If you are receiving Social Security retirement benefits, it's important to understand how they work -- and how your income from this source could change over time.
Specifically, you should understand the cost-of-living adjustment, or COLA, as this can impact your buying power during your retirement. The rules for the COLA mean that you're likely to see a benefits increase next year, but it may not be a big one and may not actually provide you the support you need. You must be prepared for that.
Here are three key things you need to know today about the 2025 COLA so you can start making financial moves now to get ready for next year.
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COLAs are built into the program
The first thing that you must know about the 2025 COLA is that it happens automatically. Lawmakers do not have to take any action to give retirees a raise. This is a good thing, as waiting for Congress to pass legislation each year could be stressful for seniors.
The COLA is built into the program. When the chosen formula shows that prices are increasing, retirees are going to get a raise. Since Americans continue to cope with higher-than-normal inflation, this means seniors on Social Security should prepare to see bigger checks next year.
COLAs are calculated using CPI-W data
The next thing you should know about the COLA is how it is calculated. Understanding the formula is crucial because it is a flawed formula. Under the current system, the amount of the COLA each year is based on year-over-year changes to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
This financial index tracks the cost of a basket of goods and services designed to represent the typical spending of urban wage earners and clerical workers. Sadly, this group doesn't spend money in the same way that seniors do. The result is that the formula usually underestimates the actual inflation retirees experience.
So, while you are probably going to get a COLA next year, it probably is not going to be a large enough benefits increase that you truly maintain the buying power you currently enjoy. Social Security benefits have actually lost 36% of their buying power since 2000, according to the Senior Citizens League. This is a shocking decline.
There's no reason to assume this trend won't continue next year. So, you should know right now that while you may be getting a raise, you're still likely to lose ground and may need to start making some adjustments to your purchasing habits to plan accordingly.
The 2025 COLA is likely to be smaller than in recent years
Finally, you should know that the 2025 COLA probably isn't going to be as generous as the raises retirees have received in recent years.
The Senior Citizens League is projecting that the 2025 COLA is going to result in a benefits increase of just 2.63%. By comparison, over the last three years, retirees received a 3.2% raise in 2024, an 8.7% raise in 2023, and a 5.9% raise in 2022.
If you retired pretty recently and have gotten used to these big raises, start coming to terms now with the reality that this isn't going to happen next year. This could also necessitate beginning to make some changes to your budget, especially if you've found prices are higher this year and you were counting on the COLA raise to help cover them.
Understanding these facts about your COLA today can help you make informed choices about how to plan for 2025 so you aren't caught off guard and faced with financial distress.
