The Social Security Administration announced a very modest increase in Social Security benefits for 2025. Starting next January, Social Security paychecks will reflect a cost-of-living adjustment of just 2.5%. This small bump is due to the steady decline in inflation and the decline in prices of some goods and services. However, the 2.5% represents a significant decline from the record increase of 8.7% given in 2023 when inflation was rising sharply.
The 2.5% COLA is close to the average increase over the past 20 years
The 2.5% increase is slightly lower than the average increase of 2.6% seen over the past 20 years, but well below the long-term average. Over the past 47 years, the COLA has averaged 3.7%.
The relatively modest increase for 2025 may seem insufficient, especially when prices are just beginning to stabilize.
High and low cola increases
Since 1975 when COLAs were introduced, the highest COLA for Social Security was 14.3% in 1980, but that was an anomaly. The only other times COLA was at or above 8% were in 1975 (8%), 1979 (9.9%), 1981 (11.2%), and 2023 (8.7%).
It is interesting to note that there were 3 years with a 0% increase (2010, 2011, and 2016).
Will a 2.5% increase be enough to maintain quality of life?
COLA this year could come in handy. However, recent data from the Senior Citizens League (TSCL), an advocacy group, found that 80% of elderly households in a 2024 survey reported that their monthly budget for basic items such as food, housing, and prescription medications had increased over the past 12 years. months, with 63% saying they are concerned that their income will not be enough to cover these basic costs in the coming months.
Because of the way the COLA is calculated (see below), previous increases have not kept pace with the rising costs of health care and other costs for retirees.
“Making sure seniors have enough to feed and house themselves with dignity is the main reason we are calling for the 3% COLA minimum,” says Shannon Benton, CEO of TSCL. “TSCL research shows that nearly two-thirds of seniors depend on Social Security for more than half of their monthly income, and 28% depend on it for all of it.”
Medicare costs will determine the true impact of the COLA increase
Research by Senior Citizens League analyst Mary Johnson in 2022 found that over the past 21 years, COLAs raised Social Security benefits by 55 percent but housing costs rose nearly 118 percent and health care costs rose 145 percent over the same period. Period.
This year is no different. Fidelity’s annual Cost of Care Survey found that out-of-pocket health care costs for people 65 and older rose 5% in 2024. That makes health care costs twice as high as health care costs.
Since health care makes up a larger percentage of a senior’s budget, the difference can be significant.
How much does Social Security payroll increase with COLA?
Social Security benefits vary widely depending on when benefits start and your income levels throughout your employment. However, on average, the hike would increase retirees’ monthly payments by more than $50.
the Social Security Administration They say they will start notifying people of their new benefit amount by mail starting in early December. If you have personality My social security Your Account Before November 14, you can view your COLA notice online.
Is there an upside to a modest increase in COLA?
It may seem that large increases in Social Security benefits are good news and small increases are bad. However, the larger stipends are intended to help retirees keep up with inflation. Inflation is not good news for anyone.
It’s time to update the data in your retirement plan
It’s a good idea to always keep your retirement plans updated with any changes to your financial situation. This news may cause an update to the amount of Social Security benefits as well as inflation expectations.
Social Security benefit amount
If you’ve already started Social Security, you may want to update your COLA projections in Boldin Retirement Planner.
Economic inflation
In light of declining inflation, everyone should evaluate their assumptions for Social Security’s COLA, general inflation, home appreciation, and Medicaid inflation in Bouldin’s retirement plan.
How is Social Security’s cost of living (COLA) calculated?
the First Social Security COLA increase That was in 1950. It took an act of Congress, and interest increased by 77%. Two more acts of Congress in the 1950s brought the total increase to 125% of its original level by the end of the decade. From 1950 to 1975, the ACA was increased by individual acts of Congress nine times.
In 1973, a law was issued stipulating this Social security Benefits will keep pace with inflation, and the first automatic annual COLA increase was in 1975 Social Security Law Specifies that COLAs are determined based on increases (decreases are not used) in the Consumer Price Index for Urban Wage and Clerical Workers (CPI-W).
The Social Security Administration uses average CPI-W data from July, August, and September of the previous year and compares it to the same time period in the current year. The percentage change in the two numbers is the COLA increase.
Does the way Social Security COLAs are calculated penalize retirees?
As the name suggests, the Consumer Price Index (CPI-W) measures increases in the costs of the types of things urban workers typically buy. The problem with using this measure for Social Security is that retired seniors spend money very differently than most workers. Notably, older adults spend slightly more on health care than the general population.
What makes matters worse is that health care costs typically rise much faster than most other goods and services. Various measures show that health care costs have risen 3% to 12% annually in the past decade. Seniors spend a greater proportion of their income on health care than the average worker.
According to the Senior Citizens Association, “pent-up growth in Social Security benefits not only creates persistent problems regarding adequacy of benefits for retirees, but also creates Medicare budget problems when COLA is insufficient to cover rising Part B premiums for large numbers of beneficiaries.” .
Alternatives to the CPI-W method of calculating Social Security’s COLA have been proposed, including the so-called R-CPI-E About the “Retirement Price Index for Older Americans.” This method of calculating inflation was mandated specifically for people over age 62 under the Older Americans Act of 1987, but was never used to update Social Security’s COLA.
How to make sure you have enough retirement income
Social Security is only designed to replace a portion of your retirement income. It’s almost (but not quite) impossible to live on Social Security alone.
Here are 4 things you should do to make sure you have enough retirement income, regardless of the 2022 Social Security increases:
1. Calculate all sources of retirement income
You will need to consider how you will withdraw and/or profit from your savings and whether or not you have a pension, passive income or retirement job.
2. Estimate your retirement expenses
How will your spending change over the course of retirement?
3. Inflation assessment
Ronald Reagan said: “Inflation is as violent as a mugger, as frightening as an armed robber, and as deadly as a hitman.” And this is true. Inflation will make any money become worthless. This is one reason why predicting and calculating inflation correctly is so important for your future financial security.
4. Protect yourself from other risks
Inflation isn’t the only unknown that can wreak havoc on your retirement finances. You also need to plan for an extended life, a health emergency, natural disasters, and more.
Build Social Security income projections into your retirement plan
Sound complicated? It doesn’t have to be.
The Boldin Planner is an easy-to-use but very detailed tool that will tell you if you have enough retirement income. You can set different levels of spending and income for different stages of retirement.
You can also set your own estimated inflation rates – one for public spending, one for housing, and medical costs can also be set separately. Try different rates for each category and see how they impact your financial health for retirement.
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