The Cost of Living Adjustment (COLA) for Social Security benefits is a critical factor that affects millions of Americans, particularly retirees actively collecting benifits and those on fixed incomes programs such as SSI and SSDI. As we approach 2025, understanding how COLA is calculated, its implications, and whether it truly reflects the rising costs of living is more important than ever. This blog post dives into these aspects, providing a comprehensive look at the COLA for 2025.

In addition to those actively collecting benefits, this is often a major source of income in retirement, so it’s important for anyone to consider in their retirement planning, even if they don’t plan to retire in the immediate future.

Understanding COLA

Calculation Method

COLA is determined by the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the third quarter of one year to the third quarter of the next. This method aims to reflect the average increase in prices for a basket of goods and services typically consumed by these workers. The annually adjustment is typically announced in late October or early November of every year.

COLA Details For 2025

On October 10th, 2024 the COLA has been set at 2.5% for 2025. This adjustment will take effect starting with the benefits payable in January 2025. For those receiving Supplemental Security Income (SSI), the adjustment will be reflected in their payment at the end of December 2024.

COLA and Inflation

How It Compares To CPI

The COLA, specifically tied to the CPI-W, might not always align perfectly with the general CPI or other inflation metrics. This discrepancy is because the CPI-W focuses on the spending patterns of a specific subset of the population, which might not fully represent the broader economic inflation rates or the actual spending habits of retirees.

The 12 month YOY CPI number in September was 2.4% this means that this years COLA adjustment is 0.1% higher than the official YOY CPI number. Of course there is some argument to how accurate the CPI number is in capturing the real impact of inflation on average americans, that is a topic for another article.

Effectiveness in Keeping Up

The effectiveness of COLA in maintaining purchasing power depends on how well it matches with real inflation rates: - If general inflation exceeds 2.5%, the real buying power of Social Security benefits decreases. - Inflation rates in essential sectors like healthcare, which disproportionately affect the elderly, might rise faster than the overall CPI-W.

Many economist argue that while some items such as medical expenses disproportionately affect seniors, other categories such as travel and expenses related to raising children are typically lower as people get older balancing things out.

Impact and Reach

Over all over 68 million individuals receive Social Security retirement benefits, with many more on SSI, SSDI and other programs. COLA is estimated to impact around 72.5 million Americans in 2025. This means the COLA affects a significant portion of the U.S. adult population, directly impacting their financial stability and quality of life.

Sustainability and Public Sentiment

Financial Stability: The long-term sustainability of Social Security is under scrutiny, with demographic shifts towards an aging population and economic factors posing challenges.

This of course assumes nothing changes with the program and we all know nothing stays the same forever. It’s reasonable to expect a combination of changes to SSI payroll taxes, increases in retirement age, and reduction in benefits over time to keep the program going in the future.

This of course makes retirement planning for younger americans more important than ever!

Public Sentiment: From social media and public forums, there's a noticeable dissatisfaction among some beneficiaries. They argue that the 2025 2.5% increase doesn't cover their real increase in living expenses, especially in crucial areas like healthcare. Discussions on platforms like X (formerly Twitter) highlight skepticism about how inflation is measured, suggesting it might not accurately reflect the lived experience of those on fixed incomes.

Younger working Americans also express frustration of paying such a large percentage of their incomes into a system that may not look the same as it does today when they get closer to retirement age.

These frustrations aren’t entirely unfounded from young Americans either, France recently raised it’s retirement age for benefits sparking riots and widespread protests other countries such as the UK have plans to raise retirement age to 67 in 2026/2027 and then to 68 in the 2040’s as they grapple with the increasing costs of retirement entitlement programs in an aging population

Conclusion

The 2025 COLA of 2.5% represents an attempt to adjust Social Security benefits in line with the cost of living. Is slightly lower than the historical long running average of 2.6%. However, its real impact on maintaining the purchasing power of retirees and fixed-income individuals is debated. As we look towards future COLA calculations, it's crucial to consider not just the numbers but the actual cost increases in areas most affecting these populations. The sustainability of Social Security, both financially and in terms of policy, remains a critical conversation for the future, ensuring that COLA adjustments continue to serve their intended purpose effectively.

This discussion isn't just about numbers; it's about the quality of life for millions of Americans, highlighting the need for a nuanced approach to inflation measurement and benefit adjustment.

If you feel SSI retirement benefits and the yearly COLA increase may not be enough to live comfortably in retirement I encourage you to join my Free News Letter where I share my early retirement journey (retired age 32) and how I’m navigating these challenges!

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