Many people are questioning the future of Social Security and its yearly cost-of-living adjustment (COLA) as we approach 2025. The COLA is an essential component of Social Security, ensuring that benefits remain consistent with inflation and preserving purchasing power for retirees and other recipients.
Meanwhile, there’s growing concern that the COLA in 2025 might drop. Let’s explore the possible causes of this decline and the implications for you.
The Possible Projection for 2025
The newest estimate from independent Social Security and Medicare policy researcher Mary Johnson suggests that the Social Security COLA for 2025 maybe 3% as the pace of inflation moderates.
This estimate is less than the 3.2% benefit increase that began in January 2024 for over 66 million beneficiaries. Furthermore, it is far less than the record 8.7% COLA beneficiaries received in 2023 and the 5.9% COLA implemented in 2022 in reaction to historically high inflation.
How the COLA for Social Security is Determined
Based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), Social Security releases a yearly COLA. The third quarter of this year’s CPI-W data is compared to the same period last year by the Social Security Administration.
A COLA is applied if there is a rise; if not, there is no COLA. The COLA estimate may change since it’s still early in the year.
Why the COLA Might Be Lower in 2025
Examining the most current CPI-W data explains why the increase is lower than the recent record-high hikes that retirees experienced. As of May 2024, the prices for some categories had dropped by a double-digit percentage compared to the same period two years prior.
Gasoline fell by 17.7%, airline tickets by 19.4%, and fuel oil by 35.3%. What, therefore, is causing people to worry about a reduced COLA in 2025? Several variables could lead to this possible result:
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Lower Inflation Rates
The main factor influencing the COLA is inflation. The COLA will decrease in proportion to lower rates of inflation. We’ve witnessed notable swings in inflation rates over the last few years, primarily due to the economic effects of the COVID-19 pandemic.
There’s a chance that inflation will drop when the economy stabilizes, which would reduce the COLA.
Economic Recovery Patterns
A major factor is also the character of the economic recovery. A slower COLA could result from a gradual and steady recovery that controls inflation. On the other hand, rapid economic growth might lead to higher inflation.
It’s difficult to project precisely what will happen because economic recoveries are naturally unpredictable, particularly after a worldwide pandemic.
Energy Prices
The price of energy, especially gas and oil, significantly impacts the CPI-W. Changes in these prices are significant enough to affect the COLA similarly.
A reduction in the worldwide inflation rate could result in a smaller COLA if energy prices stabilize or decline, as some analysts anticipate, as the world economy recovers from the pandemic.
Supply Chain Issues
Due to the pandemic’s severe disruption of global supply networks, the cost of many goods and services has increased. As these problems are fixed, we can anticipate price stabilization or maybe a drop in specific sectors.
This stabilization may result in a decline in the total rate of inflation. A lower inflation rate would directly affect how the Social Security COLA is calculated and might lead to a more minor adjustment in 2025.
The Impact of a Lower COLA: Purchasing Power
A lower COLA results in less growth in Social Security benefits, which account for a significant percentage of many retirees’ income.
A lower adjustment may impact their capacity to keep up with growing expenses, especially if inflation in essentials like housing and healthcare exceeds the rate of general inflation.
Budgeting Challenges
Beneficiaries might need to adjust their budgets due to a lower rise in Social Security income. This might include finding ways to save on necessities like groceries and utilities while also cutting back on discretionary expenditure on entertainment and eating out.
These adjustments may be especially difficult for people already living on a limited budget, and they may need to make big changes to their lifestyle and financial planning to stay financially stable.
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Long-Term Financial Planning
A lower COLA impacts both short-term budgeting and long-term financial planning. To pay for daily expenditures, retirees may need to withdraw larger amounts from their assets than planned, which might quickly deplete their retirement savings.
This could compromise their long-term financial stability and force them to review their savings plans. To ensure they have enough money to support their retirement lifestyle over time, they might need to look into alternate sources of income or adjust their investment plans.
What Can Beneficiaries Do?
To prepare for a potentially lower COLA in 2025, Social Security beneficiaries can follow these steps: consider part-time work as a means of improving income; review and adjust their budget to prioritize essential expenses.
They can also explore assistance programs for additional housing, healthcare, and food support and stay informed about Social Security and COLA projections to anticipate and adjust to changes.
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