Will Retirees on Social Security Do Better Financially in 2025 Once Their 2.5% COLA Takes Effect? Here's What History Says

Last month, the Social Security Administration shared some news that millions of seniors have been waiting for -- an official 2025 cost-of-living adjustment, or COLA. Benefits will be rising 2.5% at the start of the new year. And while that's certainly not the smallest COLA seniors have ever gotten, it pales in comparison to recent ones, including the 3.2% raise seniors got earlier this year.

Of course, we do need to consider the big picture. The reason 2025's Social Security COLA is only 2.5% is that inflation has slowed down considerably in 2024 compared to recent years. So in theory, things should balance out, and seniors on Social Security should be able to maintain their buying power in the new year.

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But if history tells us anything, that won't actually be the case. And Social Security recipients may unfortunately be in for a world of financial distress in 2025.

That's not necessarily a function of a 2.5% COLA, though. It's more of a general problem that's been persistent for years, including periods when COLAs have been much larger.

Social Security beneficiaries keep losing buying power

The reason Social Security recipients are likely to lose out on buying power in 2025 is because the program's COLAs have long failed to actually keep up with living costs. As of last year, Social Security benefits had lost 36% of their buying power since 2000, according to the nonpartisan Senior Citizens League. And a big reason for that boils down to a flaw in the system.

Social Security COLAs are calculated based on data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). But it's pretty clear just by reading the name of that index that it's not particularly descriptive of the costs seniors on Social Security tend to face.

If Social Security COLAs were to be based on the Consumer Price Index for the Elderly, or CPI-E, instead of the CPI-W, that would likely allow benefits to do a better job of keeping up with rising costs. That's because the CPI-E would account for some of the expenses that are specific to Social Security recipients, like healthcare. But until that change comes about, seniors on Social Security might continue to struggle financially.

Don't end up in a bad situation in 2025

Seniors may be worried about losing buying power on Social Security in 2025. But the reality is that they run that risk even during times when COLAs are far more generous.

Seniors who are worried about being cash-strapped in the new year should look at ways to boost their income and reduce their expenses. Joining the gig economy is a great way to drum up cash, and downsizing a home is a great way to slash spending in a meaningful way. It may also be worth looking at different parts of the country where those benefits can go further.

Changes like these certainly aren't easy. But they may be necessary until lawmakers find a way to more equitably calculate what Social Security's COLAs should look like.

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