Retirees must come to terms with this harsh reality about their 2025 COLAs

Every year, many retirees are excited to find out how much of a Social Security increase they’re getting. This “raise” comes in the form of a cost of living adjustment (COLA) which usually increases benefits. Because of the COLA, seniors get a slightly larger check starting in January most years compared to the amount they were getting before.

While it may seem like it makes sense for seniors to be excited about getting more money, it’s actually very important for retirees to come to terms with a harsh truth about their COLA.

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COLA isn’t really a raise, despite the fact that you get more money

The most important thing every senior needs to realize is that the Social Security COLA might be called a raise, but it’s not one in any traditional sense of the word.

When an employer gives you a raise, they usually give you more money based on your achievements. Usually, wage growth is not specifically linked to the rate of inflation. So, from a practical point of view, the pay rise when you get a normal raise will ideally give you More purchasing power over time.

COLA, on the other hand, is not intended to give you more purchasing power. It is intended to keep your purchasing power the same as the year before and the year before and so on. Therefore, the COLA formula calculates the benefit increase based on data from the Consumer Price Index for Urban Wage and Service Workers (CPI-W).

The Social Security Administration uses a formula that gives you a COLA equal to the percentage increase in the CPI-W in the third quarter of the year. If this financial index shows that the prices of a basket of goods and services in July, August and September 2024 are higher than the cost of the same basket of goods and services in 2023, retirees receive an equal increase in Social Security benefits. to growth.

The problem with this approach, however, is that this COLA does not increase the disposable income you have available to spend. Sure, you’ve been given more money — but you have to pay all that extra money just to buy the things you’re buying anyway that you’re now paying a higher price for. You haven’t gained ground with “growth” and you can’t improve your lifestyle because of it.

There is an even bigger problem with COLAs

While seniors may be disappointed to realize that the COLA they’re getting isn’t a raise, but merely designed to help their lifestyles stay stable, there’s actually even worse news for retirees to deal with. reconcile now Specifically, COLA probably isn’t doing what it’s supposed to be doing and not keeping seniors from losing ground. By contrast, the Senior Citizens League estimates that pension benefits have lost 36 percent of their purchasing power since 2000.

The big problem is that the basket of goods and services is used to calculate the COLA. At the moment, the formula tracks changes in the prices of goods and services used by urban wage earners and service workers. However, seniors spend differently than this group, devoting more money to things like health care expenses, which tend to experience above-average inflation. Because the inflation they experience is underestimated, their COLA helps a little in terms of keeping the real value of their benefits, but most seniors end up with expenses that rise more than the cost of their raise.

An “upgrade” that gives you the ability to buy less than you could before isn’t really a raise. Seniors should come to terms with this to make sure they don’t rely too heavily on their benefit checks or expect the COLA to do more for them than it ultimately will.