The 2025 Social Security COLA is becoming a double-edged sword, but it could be worse | The motley fool

Over 50 million Americans receive Social Security retirement benefits. Some of these retirees use Social Security only as supplemental income for their retirement savings and investments, but millions rely heavily on checks for their daily living expenses. This is why the importance of Social Security cannot be overstated.

Many would agree that as helpful as Social Security is, it’s not the easiest social program to navigate, given all the moving parts and changes that seem to happen year after year. However, one change that people expect every year is the cost of living adjustment (COLA).

Although the official Social Security COLA number isn’t released until October, the estimates can give people a sense of what to expect. Estimates for 2025 are shaping up to be a double-edged sword.

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How the Social Security COLA works

It only takes a simple trip to your neighborhood store to see the effects of inflation. Everything from eggs to deodorants to medicines have risen in price significantly over the years. To ensure that retirees don’t lose too much of their purchasing power from their Social Security checks, Social Security adjusts benefit amounts each year to account for inflation.

To determine the COLA for a given year, Social Security uses the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), a measure of monthly inflation that takes into account items such as housing, food and medical care .

Social Security averages the CPI-W for the third quarter months (July, August, and September) and compares it to last year’s numbers to determine next year’s COLA. For example, the CPI-W average for the third quarter was 301,236 in 2023 and 291,901 in 2022. This 3.2% change became the 2024 COLA, which took effect starting in January 2024.

If the CPI-W numbers are lower than last year, no COLA will be made and benefits will remain the same. It’s not common, it’s only happened three times since 1975.

Why COLA 2025 is poised to be a double-edged sword

The senior advocacy group, the Senior Citizens League (TSCL) estimates that the 2025 COLA could reach about 2.66% (will round it to 2.7%). The average monthly benefit for retired workers in April was $1,915, meaning a 2.7% increase would bring the average benefit to about $1,967. That’s just over $23,600 a year.

Since the COLA became annual in 1975, the average increase has been 3.77%. In the last two years, retirees have been spoiled a bit, with COLAs at 8.7% in 2023 and 5.9% in 2022. Of course, these amounts were only so high because inflation was also at levels not seen in many years. but it was a pleasant increase for many.

While any increase in payments is good news for retirees, the downside is that even with the adjustment, many may find that their Social Security checks alone may not be enough to fully cover their living expenses. This is especially true when you consider that health care costs, one of the biggest expenses for seniors, are rising rapidly. For perspective, PwC’s Institute for Health Research estimates a 7% increase in medical costs in 2024, more than double this year’s COLA.

While it may be a little later than preferred for some, the lack of Social Security COLA issues further highlight why it’s important to approach retirement savings from different angles. Not everyone has access to a 401(k) throughout their career, but other sources, such as an IRA and investments, can help provide financial security in retirement.