close
close
migores1

A lower Social Security COLA in 2025 is surprisingly good news. Here’s why

Don’t assume that a less than robust raise will destroy your finances in the new year.

For months, there has been speculation about the Social Security COLA in 2025. But we’re pretty close to having an answer.

On October 10, the Social Security Administration (SSA) will be able to make next year’s COLA official. Until then, the SSA will be able to incorporate inflation data from September to arrive at an accurate number.

A smiling person outdoors.

Image source: Getty Images.

For now, though, there are estimates of next year’s COLA to work with. And based on inflation readings so far, it looks like Social Security growth in 2025 will be somewhere in the neighborhood of 2.5 percent.

With Social Security benefits rising 3.2% at the start of 2024, a 2025 COLA in the 2.5% stage might initially be bad news. But here’s why it really isn’t.

There is one benefit that seniors should know about

Social Security COLAs are calculated based on third-quarter data from the Consumer Price Index for Urban Wage and Service Workers (CPI-W), which measures changes in the cost of common goods and services for people in this category. We already have CPI-W data for July and August. But it is impossible to have a September reading before the end of September.

If inflation rises substantially this month, then the 2025 Social Security COLA could end up reaching a little more than 2.5%. But that is unlikely to happen. And it’s also not something anyone should wish for.

In fact, the reason a 2.5% Social Security COLA (or something in that range) isn’t a bad thing is that it’s a sign that the costs of living aren’t rising as much. And if inflation continues to cool, retirees could get a lot more buying power from a 2.5% COLA than expected.

Here’s another way to look at it. In theory, the Social Security COLA should match inflation. If there is a year in which there is no increase in the CPI-W over the following year (ie, inflation remains constant), then Social Security benefits receive a 0% COLA in the following year.

But instead of fixating on a 0% increase in this situation, a better thing to do is to recognize that costs aren’t going up either. So everything should even out.

The same concept is at play for the Social Security COLA in 2025. Next year’s increase may be lower, but prices are moderating. Because of this, seniors may find that they can cover their living costs with the raise they get.

It is best to have outside income in any case

There are some years in which Social Security COLAs are substantial and other years in which they may be stingy. While lower COLAs aren’t necessarily a bad thing, it’s best to be in a situation where one COLA over another doesn’t really make a difference. And the only way to do that is to have income outside of Social Security.

That could look like a lot of things. It could take the form of a decent-sized retirement account to tap into, earnings from a part-time job, or rent collected from an income property. But it’s best to have some sort of Social Security supplement because, regardless of the COLA, these benefits are not meant to fully replace workers’ income when they retire.

For the average wage earner, Social Security will replace 40% of what they used to make. That’s a pretty significant pay cut. So, COLAs aside, it’s best to have extra income to fall back on in retirement to avoid financial stress.

Related Articles

Back to top button