Social Security is a key lifeline for many retirees, offering a steady source of income to help them maintain their lifestyle after they leave the workforce. One important feature of Social Security benefits is the annual Cost-of-Living Adjustment (COLA), which aims to keep these benefits in line with the rising cost of goods and services. However, there are several important details about Social Security and COLA that many seniors may not fully understand. Here are five key things you should know before retiring.
1. How the Social Security COLA Is Determined
Each year, the Social Security Administration (SSA) adjusts benefits based on the Cost-of-Living Adjustment (COLA). This adjustment is determined by comparing the Consumer Price Index (CPI) data from the third quarter of the current year to the same months of the previous year. For example, the 2025 COLA will be based on CPI data from July, August, and September of 2025, compared to the same months in 2024.
The CPI measures inflation, but not all versions of the CPI are the same. For Social Security, the CPI-W (Consumer Price Index for Urban Wage Earners and Clerical Workers) is used. This index mainly reflects inflation experienced by working Americans.
2. Why the COLA Doesn’t Always Keep Up With Rising Costs
One thing to keep in mind is that the COLA doesn’t always reflect the actual increase in expenses that seniors face. Although the CPI-W is used for COLA adjustments, it doesn’t account for certain costs that disproportionately affect seniors, like healthcare. There’s another version of the CPI, the CPI-E (Consumer Price Index for Americans 62 and Older), which weighs healthcare and other senior-specific costs more heavily.
If Social Security were to switch to using the CPI-E, it is estimated that seniors would see an average COLA increase of about 0.2 percentage points higher each year. While this may not seem like much, over time, it could make a significant difference in the purchasing power of retirees.
3. The COLA Takes Effect in December, Not January
This is a subtle but important point that confuses many. Although the Social Security COLA is announced in the fall, it officially takes effect in December. However, because Social Security payments are made a month in arrears, seniors won’t see the COLA reflected in their payments until January.
Therefore, when discussing the COLA, it is often referred to as the following year’s adjustment. For example, the 2.5% COLA for 2025 will be reflected in January 2025 payments, even though the adjustment is determined in December 2024.
4. The 2025 COLA Is the Lowest in Four Years
This year, the Social Security COLA is lower than it has been in recent years. The 2.5% increase for 2025 is the smallest adjustment seen in four years. While it’s still a positive change for many retirees, it falls short of matching the pace of inflation that seniors experience, especially when it comes to costs like healthcare and housing.
For context, here are the recent COLA adjustments:
- 2024: 3.2%
- 2023: 5.9%
- 2022: 5.9%
- 2021: 1.3%
Although inflation has cooled compared to the sharp increases in recent years, the low COLA increase in 2025 means that many retirees may find it difficult to keep up with their daily expenses.
5. Most Seniors Feel the COLA Isn’t Enough
A recent survey from The Motley Fool found that 81% of retirees believe the 2025 COLA will not be enough to cover their essential living expenses. This is because some of the costs that hit seniors hardest, like healthcare and housing, have risen faster than general inflation. Healthcare costs, for example, have gone up by 3.4% in the past year, and housing prices have risen by 4.6%.
Seniors are finding it harder to make ends meet despite the COLA adjustment. The cost of living for older adults doesn’t always align with the broader economic inflation that the COLA is based on. As a result, many retirees find themselves still struggling to keep up with increasing prices for things like medicine, rent, and utilities.
What Can Be Done?
While the COLA is an important feature of Social Security, it is far from perfect. There are ongoing efforts to revise the formula to better reflect the costs seniors face. Some lawmakers have pushed for the use of the CPI-E, which would likely provide a more accurate adjustment for the senior population. However, despite some legislative efforts, significant changes have yet to be made.
In the meantime, Social Security remains one of the few inflation-protected income sources for many retirees. While the COLA may not always keep pace with living costs, it still provides a valuable safety net for millions of Americans.
The $22,924 Social Security Bonus Most Retirees Overlook
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