The Social Security Administration is scheduled to release the 2025 Social Security Cost of Living Adjustment (COLA) on October 10th, which could disappoint many retirees.
Over the past three years, seniors have become accustomed to super-large pay increases. of cola In 2022, 2023, and 2024, the percentages were 5.9%, 8.7%, and 3.2%, respectively. However, under current circumstances, retirees could end up receiving an increase of just 2.5% in 2025.
But for many retirees, a lower COLA has surprising benefits and could mean that many seniors would be better off with a smaller monthly benefit check.
How the government calculates your Social Security COLA
Social Security's annual cost-of-living adjustment is designed to allow Social Security benefits to keep up with inflation. The Social Security Administration uses a subset of the Consumer Price Index known as CPI-W. It measures the cost of a basket of goods and services representative of the typical expenditures of urban salaried and office workers.
Specifically, SSA measures the increase in CPI-W in the third quarter of this year compared to the previous year. That increase will be your COLA for the following year. Therefore, the 2025 COLA will become official once SSA receives the September CPI-W measurements on October 10th.
Many argue that the CPI-W is not representative of most seniors' spending. That means COLAs aren't keeping up with the amount retirees spend on goods and services each year. In fact, the Bureau of Labor Statistics has created a new CPI subset called CPI-E. It measures the cost of a basket of goods that tracks the spending patterns of Americans age 62 and older. These are the households directly affected by the Social Security COLA.
Some argue that switching COLA to CPI-E, or some other measure that is more representative of the actual costs faced by retirees, would allow many retired households to maintain their standard of living. The average Social Security recipient who started receiving benefits in 2010 has seen a 20% drop in purchasing power since receiving their first check, according to the Alliance on Seniors.
But the fact that the COLA is based on a measure of inflation means that a smaller COLA could be a surprisingly good thing for many retirees, even if it's a mistake. do.
The Amazing Benefits of a Small Social Security COLA
Many retirees don't rely entirely on Social Security to fund their retirement. They saved and invested in IRAs, 401(k)s, and tax brokerage accounts.
According to the Federal Reserve's latest Consumer Finance Survey, the median household with a person 62 years or older who saved and invested during their working years will have a retirement account at the end of 2022. In all, he had invested $200,000 in brokerage accounts. Based on stock market returns since then, these balances may have increased significantly.
There are no cost of living adjustments for these investments. They are subject to the whims of the market. All things being equal, these investment accounts will have more purchasing power if inflation is low. Social Security COLAs, on the other hand, are lower when inflation is low, but are theoretically supposed to maintain purchasing power.
Retirees with large retirement savings could be far better off with a lower COLA in 2025. If your COLA remains low, you will actually have more purchasing power in the future.
Even if you rely more on Social Security, slow, steady inflation has historically been better for the overall purchasing power of your monthly check than high inflation. According to a survey by the Federation of Senior Citizens, since 2010, Social security purchasing power increases In most years, the COLA was less than 3%. The Fed continues to target annual inflation of 2%, so a 2.5% rate hike should lead to more purchasing power next year.
So while many may be disappointed by the SSA's October 10 announcement, if you consider the big picture and the total amount of retirement savings and income, seniors will easily be able to afford things in 2025. It should be.
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The 2025 Social Security Cost of Living Adjustment (COLA) is almost official, potentially revealing surprising benefits for many retirees. Originally published by The Motley Fool
