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What to expect from Social Security’s 2025 COLA adjustment

VaselineOctober 14, 2024

0 3 minutes read

What to expect from Social Security’s 2025 COLA adjustment

Annual increases in Social Security benefits have ranged from 0% to 8.7% in recent years. The 2025 COLA will be at the lower end of that range, reflecting slowing inflation.

Social Security recipients, including Arizona’s approximately 1.5 million residents, will receive a 2.5% cost-of-living adjustment (COLA) starting in 2025, increasing the average monthly benefit by about $48. The average payment is currently almost $1,920.

The Social Security Administration announced the new inflation increase on October 10. COLAs, which are uncommon outside of Social Security benefits, help recipients keep up with rising prices for food, shelter, transportation and more. Here’s how the new numbers could affect your finances:

What are COLAs?

They are annual benefit increases intended to “offset the corrosive effects of inflation on fixed incomes,” according to the Social Security Administration. The increase also applies to disabled and largely needy retirees who receive SSI or Supplemental Security Income. About 68 million Americans will receive COLAs on their retirement benefits and 7.5 million will receive them on SSI benefits. Some people receive both, so the total number of affected individuals is 72.5 million, according to the Social Security Administration.

Are COLAs automatic?

Yes. Before 1972, Congress had to approve increases, which it did from time to time. Since then, COLAs have been automatic, although there are occasional years when no increases are granted, reflecting little or no inflation during those periods.

How are COLAs calculated?

Social Security COLAs reflect changes in an inflation gauge known as CPI-W, from the third quarter of one year to the third quarter of the next. Based on the latest release from the Bureau of Labor Statistics, the CPI-W increased 2.5% from July through September 2023, compared to July through September of this year.

The official name for CPI-W is the consumer price index for urban wage earners and white-collar workers. It is slightly different from another widely followed inflation gauge, CPI-U or the Consumer Price Index for all urban consumers.

How has inflation changed lately?

Many Americans are struggling to make ends meet, but inflation has declined in recent years, meaning COLAs have also declined. The COLA announced in 2023 and payable this year was 3.2%, after a steep increase from 8.7% in 2022 – the largest increase since 1981. Inflation measures the change in prices, not whether it is in the eye of the beholder be cheap or expensive.

And while 2.5% may look paltry, “it’s really consistent with the last 20 years,” says Lisa Featherngill, national director of wealth planning at Comerica Wealth Management.

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What percentage of retirees are mainly dependent on social security?

It is the main source of income for 40% of older Americans, says Jo Ann Jenkins, CEO of AARP. COLAs are vital for these people and ensure they have “an inflation-protected source of income in retirement,” she said.

What else can people do to make ends meet?

Featherngill sees this as a good time to take a closer look at your cash inflows and outflows, especially before the holiday shopping pressures kick in. What expenses can you save or shop around for, she asked, mentioning cable TV or car or home insurance as options. Budgeting programs like those available on Quicken or Credit Karma can help, she added.

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Do investments come with COLAs?

Generally not, although some include inflation protection. TIPS, or Treasury Inflation Protected Securities, bond-like investments issued by the federal government, are a clear example of this. Some other assets, such as broadly diversified stock market portfolios, have also outperformed inflation in recent decades, but not with anything resembling the certainty or predictability of Social Security COLAs. Additionally, gold and some other commodities are considered inflation hedges.

Do COLAs worsen Social Security’s already precarious funding status?

Yes, that is correct, as these are significant new expenses for the program. Social Security is expected to hit a wall in 2033, at which point benefits could be cut to 79 cents on the dollar from current levels. Congress can support the program by cutting benefits, raising taxes, or opting for a combination of the two, but so far politicians have shown no resolve to make these difficult decisions.

Both presidential candidates, Donald Trump and Kamala Harris, have pledged to protect Social Security, but neither has put forward a meaningful plan to do so, according to the Committee for a Responsible Federal Budget. In fact, Trump’s proposal to end partial taxation of Social Security benefits would worsen the program’s finances, the group said.

The Social Security trust fund is expected to be depleted by 2033, after which benefits would be cut by 21% without any reform. The committee estimates that this would result in a $16,500 reduction in annual benefits for an average dual-income couple currently in retirement.

Reach the writer at [email protected].

VaselineOctober 14, 2024

0 3 minutes read