Here's the Real Problem With 2025's Social Security Cost-of-Living Adjustment (COLA)

There's a reason Social Security benefits are eligible for an annual cost-of-living adjustment (COLA). If benefits were to remain flat from year to year, seniors would lose buying power over time due to inflation. Because of this, benefits are adjusted for inflation to prevent seniors from falling behind.

At this point, you may be eager to know what your 2025 Social Security COLA will amount to. And unfortunately, you'll need to sit tight just a bit longer.

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Social Security COLAs are based on third quarter inflation date. Since September isn't over yet, there's no inflation reading for the month. And until that data becomes available, the Social Security Administration (SSA) can't put out an official COLA.

But based on what we know so far, it's looking like 2025's Social Security COLA will end up somewhere around 2.5%. That's the working estimate based on inflation readings from July and August. And it's also a considerably lower number than seniors' most recent COLA -- a 3.2% raise that boosted benefits at the start of 2024.

But while a smaller 2025 COLA is a frustrating enough thing for seniors to grapple with in its own right, there's an even bigger problem with next year's COLA that retirees should know about.

If you're reliant on Social Security, you're likely to fall behind

A stingy Social Security COLA is bad news beyond the matter of less money in your monthly benefits. Even when COLAs are more generous, they tend to do a poor job of helping seniors keep up with their living costs. And 2025's COLA will probably be no exception.

The problem lies in the way Social Security COLAs are calculated. They're based on readings from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). But all you need to do is read the name of that index to realize that it's not exactly geared toward seniors -- not even close.

Urban wage earners and clerical workers tend to be younger Americans who aren't receiving Social Security benefits. This isn't to say that no one on Social Security holds down a job. But for the most part, it's fair to say that the CPI-W does not accurately capture the costs Social Security recipients face, since they're likely to face different expenses than working folks.

As just one example, healthcare can be a burdensome expense for everyone. But older Americans -- those eligible for or on Social Security -- are more likely to spend a larger portion of their income on medical expenses since health issues tend to arise with age.

The CPI-W doesn't take this and similar factors into account. And because of this, seniors on Social Security have been losing buying power year after year.

A change that could improve your financial picture in 2025

You can't rely on 2025's Social Security COLA to improve your personal financial situation. But one thing you can do to better your finances is join the gig economy.

Working as a retiree isn't what it used to be. These days, you don't have to commit to a retail schedule or resign yourself to a part-time desk job. You can find gig work you enjoy to a reasonable degree and put in a few hours a week to earn extra money. Plus, you can choose your own schedule so you're not locked into hours that don't work for you.

If you love pets, for example, you could sign up to care for them while their owners travel during periods when you're not busy. If you don't mind hitting the road, you can drive for a rail-hailing service a couple of afternoons a week -- or a couple per month, if that's a better schedule for you.

Any extra money you earn is money you can use to pay bills or pad your savings. And that could make it so that a smaller Social Security COLA is much less of a problem.

The SSA will be able to make an official 2025 Social Security COLA announcement on October 10. But don't wait that long to come up with a game plan for improving your finances in the new year. Instead, look at some options for generating income yourself so you're able to manage your senior expenses with a lot less stress.

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