Will Social Security COLA Increases in 2025 Be Enough for Retirees?

Social Security Cost of Living Adjustments (COLAs) were instituted in 1975 to keep up with inflation and help retirees maintain their purchasing power. However, many people argue that the adjustments are not enough to keep up with rising costs of necessities such as housing, food and utilities.

Annual COLAs are calculated using the previous year’s Consumer Price Index (CPI) figures to closely tie adjustments to inflation. The September CPI – announced in October – is the last update taken into account in the calculations, making it a highly anticipated figure.

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Bob Powell, CFP and editor of Retragement Daily, has some predictions for the 2025 COLA, which will be announced shortly after the September 2024 CPI release.

He notes that retirees are feeling the squeeze because consumer prices have remained high and the Fed’s recent interest rate cut will likely hurt investment returns.

Inflation has become a growing concern for retirees

Powell explains that the next CPI update will be a key indicator of Social Security’s 2025 COLA.

“The next CPI report will come out in October, and shortly after that the Social Security Administration will announce what the cost of living adjustment will be,” he said. It’s probably going to be down, I guess maybe around 3% or so.”

Although inflation is cooling, prices have not, adding an additional financial challenge for Americans of all ages.

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“Whatever your Social Security benefit was the previous year, it will be adjusted upward by 3 percent,” he explained. “Some people say 3% is not enough to offset the cost of living – they will still be behind the eight ball even with the adjustment. And I would say, in general, that might be true because you’re probably spending more than you did in previous years.”

A retired couple is seen holding hands and walking on a beach.

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Lower interest rates are another problem for retirees

Powell notes that stubborn inflation rates are becoming more of a challenge for retirees because there hasn’t been an inflationary period of this magnitude in decades.

“For many years, Social Security recipients have benefited from the zero interest rate policy — COLAs have been low, but the CPI has also been low,” he continued. “Except for the last few years, retirees haven’t had to worry about inflation. Adjustments were low, but so were consumer prices.”

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“There is a consumer price index that looks at the cost of living for the over-62s and it shows that it is roughly equal to the standard CPI,” he added.

Retirees are finding that their expenses are outstripping their retirement savings, and Social Security isn’t having as much of an impact as it once did.

“For me, it’s a double-edged sword. On the one hand, when you have high inflation, you typically have high interest rates, which benefits people who invest in CDs and money market funds,” he explained. “On the other hand, high inflation hurts people because their incomes may not grow as fast as their expenses.”

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