Feeling the Pinch? Social Security’s 2025 COLA Hits Rock Bottom

CLS Digital Arts / shutterstock.com
CLS Digital Arts / shutterstock.com

The recent Social Security adjustments have been a concern for retirees, especially with the 3.2% increase in benefits at the beginning of 2024. This raise was considerably lower than the 8.7% increase in 2023, leaving many seniors disappointed.

Looking ahead to 2025, early indicators suggest that the Cost-of-Living Adjustment (COLA) for Social Security may be smaller than in 2024. While the exact figure has yet to be determined, as COLAs are based on third-quarter inflation data, initial estimates point to a less substantial increase next year.

Earlier in the year, experts were forecasting a COLA of just 1.75% for 2025. Although this estimate has increased slightly, it indicates a modest increase for retirees. However, even if the final figure is around 1.75%, it would not be the lowest COLA on record.

In the early 1980s, when inflation was high, seniors received a significant 14.3% COLA. In contrast, from 2000 to 2020, COLAs were notably more petite, with three years showing no increase at all.

During periods of high inflation, like in the early 1980s, significant COLA adjustments were necessary to help retirees maintain their purchasing power. Consider a retiree who relies heavily on a fixed income from Social Security. In times of high inflation, everyday expenses such as groceries, healthcare, and housing costs can surge rapidly. We may need adequate COLA adjustments to afford essential goods. This highlights the importance of responsive COLA policies that reflect economic realities and ensure retirees can meet their basic needs regardless of inflationary pressures.

It’s important to note that while COLAs are expected annually, they are not guaranteed to increase. If lower inflation rates, Social Security benefits may not see a COLA adjustment. Fortunately, low inflation cannot reduce benefits; they will stay the same.

Many retirees heavily rely on COLAs to maintain their purchasing power. However, becoming too dependent on these adjustments can pose risks. It’s advisable to save independently for retirement to have additional income beyond Social Security.

Relying solely on COLAs to maintain purchasing power can be risky due to the unpredictable nature of inflation rates and economic fluctuations. For example, suppose a retiree’s expenses increase faster than the COLA adjustments. In that case, their purchasing power may erode over time. This can lead to financial pressure and the need to make significant lifestyle adjustments to cope with rising costs. Imagine a retiree relying solely on Social Security COLAs to cover their healthcare expenses. Suppose medical costs increase at a higher rate than the COLA. In that case, they may find it challenging to afford necessary treatments or medications, impacting their quality of life.

To mitigate these risks, retirees must save independently and diversify their income sources. For instance, building a retirement portfolio that includes stocks, bonds, or real estate investments can provide additional income streams beyond Social Security benefits. This diversified approach can help buffer against economic downturns and promote a more stable financial future. Additionally, savings allow retirees to have financial flexibility and peace of mind, knowing they have a cushion to rely on during periods of economic uncertainty or low COLA adjustments.

Consider this scenario: if you invest $300 per month for 35 years at an average annual return of 8%, you could retire with approximately $620,000. Increasing your monthly investment to $400 could raise that total to around $827,000. Such savings provide a buffer, ensuring financial stability even if COLA adjustments are minimal or non-existent.

Seniors must wait until October for the official announcement of Social Security’s 2025 COLA. Despite potential modest increases, it’s unlikely to be 0%, offering some relief to retirees.