Social Security is a lifeline for millions of retired workers in the U.S., offering critical financial support. According to May’s monthly statistical snapshot from the Social Security Administration (SSA), over 55 million retirees receive an average benefit of $1,900.
However, this figure is set to change with the upcoming cost-of-living adjustment (COLA). If you’re eligible for retirement benefits or planning to apply soon, here’s what you need to know about the changes coming to retiree paychecks in the near future.
Despite inflation easing over the past year, many retirees still find it challenging to make ends meet. The 2024 U.S. Retirement Survey by investment management firm Schroders highlights that less than half of retirees feel financially secure, and nearly 90% worry about rising prices eroding their assets.
Social Security payouts are subject to annual COLAs to help maintain purchasing power as prices rise. However, the Senior Citizens League notes that “COLAs have become less likely to keep up with inflation over time.”
COLA 2024 and Its Impact
In 2024, Social Security benefits will receive a 3.2% COLA. Nevertheless, two-thirds of retirees surveyed report that their expenses have increased beyond this adjustment, diminishing their benefits’ purchasing power. This financial strain explains why many retirees are struggling. With a smaller COLA expected in 2025, the financial outlook for retirees isn’t promising.
The future of Social Security benefits hinges on inflation trends in the third quarter. COLAs are linked to inflation via the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W measures price changes based on the spending patterns of hourly workers, which may not accurately reflect retirees’ expenses, particularly for housing and healthcare.
To calculate the COLA, the average CPI-W from July through September is compared to the same period from the previous year. For instance, a 3.2% increase in the CPI-W last year resulted in a 3.2% COLA for 2024 benefits. However, the COLA for 2025 can’t be determined until the third-quarter CPI-W data is available.
Projected COLA for 2025
Recent projections suggest a 2.6% COLA for 2025. The final piece of the puzzle will be revealed on October 10 when the Labor Department releases September’s inflation data, and the SSA announces the official COLA. The Senior Citizens League (TSCL) continuously updates its COLA forecast based on new data, with the latest estimate lowering from 2.7% in May to 2.6% in June.
This forecast is concerning for retirees, as a 2.6% COLA would be the smallest in four years. If inflation continues to cool, the actual COLA for 2025 could be even lower. Here’s a breakdown of how a 2.6% COLA would affect retirees’ payments next year:
Retirement Benefits
Social Security Payments
Including (2.6% COLA 2025)
On average
$1,900
$1,949
Age 62
$2,710
$2,780
Age 67
$3,822
$3,921
Age 70
$4,873
$5,000
Looking Ahead
The future of Social Security benefits is uncertain, heavily dependent on inflation rates. While COLAs aim to preserve purchasing power, they often fall short, leaving retirees financially vulnerable. Knowing how these adjustments are calculated and staying informed about projections can help retirees better prepare for changes in their benefits.
Navigating retirement can be challenging, especially with fluctuating Social Security benefits. Stay proactive, informed, and consider consulting with a financial advisor to ensure your retirement plans remain on track despite economic uncertainties.
FAQs
How is the Social Security COLA determined?
It’s based on the CPI-W’s average from July to September each year.
What was the COLA for 2024?
The COLA for 2024 was 3.2%.
Why might the 2025 COLA be lower?
Lower inflation rates suggest a smaller COLA for 2025.
When will the 2025 COLA be announced?
The SSA will announce it on October 10, 2024.
How can retirees cope with rising expenses?
Consider budgeting, reducing costs, and consulting a financial advisor.
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A tax law expert with a knack for breaking down complex regulations into digestible insights. Ehsteem's articles on the tax news blog offer invaluable guidance to readers navigating changes in tax legislation.
