6 Things All Retirees Need to Know About Social Security COLAs

Are you a retiree already collecting Social Security benefits? Maybe you're about to become one? Whatever the case, even though the program's monthly payments aren't enormous -- averaging just a bit less than $2,000 at this time -- most everyone can certainly use this money these days after a painful spate of inflation.

And that raises an important question for current and future retirees: How does Social Security help seniors contend with ever-rising prices? The program implements regular cost-of living-adjustments (COLAs), that's how.

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Here's everything you need to know about COLAs.

1. They reflect the prior year's overall inflation rate

To its credit, at least the Social Security Administration isn't making an arbitrary judgment call regarding how much more money seniors should be receiving every month. The adjustment is based on a number determined by a different government agency. That's the annualized change in the consumer price index for urban wage earners and clerical workers (CPI-W), as calculated by the Department of Labor's Bureau of Labor Statistics. The COLA increase of 2.5% put into place for 2025 is based on 2024's price increases, translating into (roughly) a monthly payment increase of $50 for the average recipient.

2. Not everyone's is the same

Although the average monthly Social Security payment of $1,976 is $50 more than it was last year, not every beneficiary will see a $50 bump. The 2.5% increase is relative to how much Social Security income you were already collecting. Those collecting more Social Security income will see a bigger absolute increase, while those collecting smaller payments will receive a relatively smaller increase.

3. They're announced in October...

As has been the case for many years now, the 2025 cost-of-living adjustment was announced in October 2024. As such, it doesn't actually reflect the overall inflation experienced in calendar 2024. It's instead a reflection of price increases during the 12-month stretch ended in September.

Nevertheless, given enough time these cost-of-living adjustments are supposed to keep pace with long-term price increases.

4....but they don't begin until January

Although they're announced in October, COLAs don't actually go into effect until January of the next year. The aforementioned 2.5% increase was only first seen in the payments made at the beginning of this month.

5. You don't need to do anything to receive the COLA

Good news! Current and future retirees don't need to do anything to get their yearly cost-of-living adjustment. The Social Security Administration automatically makes it happen simply by increasing the size of its monthly payment electronically deposited into your bank account, or for a handful of people, by issuing bigger monthly checks.

6. They're probably not big enough

Finally, although Social Security's yearly cost-of-living adjustment reflects the Bureau of Labor Statistics' official annual calculation, your retirement COLA may still not fully reflect your rising cost of living. Indeed, The Senior Citizens League argues that since 2010 the average Social Security recipient has lost $370 worth of monthly buying power due to inadequate adjustments. That's about 20% less than they should be getting, the organization says.

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The problem is rooted in the basis for Bureau of Labor Statistics' inflation number, which reflects changes in the CPI-W. Except, retirees are no longer "urban wage earners and clerical workers." The league contends that the consumer price index for Americans 62 years of age and older would be a more appropriate benchmark because it more accurately reflects the change in costs that are relatively unique to the elderly. Chief among these unique costs, of course, is the additional healthcare that is often necessary later in life.

Just part of a (much) bigger picture

Feel free to debate the unfairness or inadequacy of Social Security's COLAs all you want. Just bear in mind it won't be time well spent. It will take a significant policy change to revamp how the COLAs are determined. It will also take time, if such changes are ever going to be made at all.

A much more fruitful use of your time would be taking actions today to offset the impact of inflation. Chief among these moves would be taking cash you don't need right away out of low-yielding checking and savings accounts and using it to but similarly liquid money market funds, which are paying in the ballpark of 5% annualized.

Also rethink any dividend stocks you might own. If a company is not regularly raising its dividend at least in step with inflation, consider selling and buying shares of companies that are.

You get the idea. When it comes to money in an environment where prices always seem to rise, every little detail matters.

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