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Will Social Security retirees be better off financially in 2025 once their 2.5% COLA takes effect? Here’s what history says
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Will Social Security retirees be better off financially in 2025 once their 2.5% COLA takes effect? Here’s what history says

If we look at the data, there is a clear answer.

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 increase by 2.5% at the start of the new year. And while that’s certainly not the lowest COLA seniors have ever received, it’s outpacing recent ones, including the 3.2 percent increase seniors got earlier this year.

Of course, we have to consider the bigger picture. The reason the 2025 Social Security COLA is only 2.5% is that inflation has slowed considerably in 2024 compared to recent years. So, in theory, things should even out, and seniors on Social Security should be able to maintain their purchasing power in the new year.

Two people at a laptop.

Image source: Getty Images.

But if history tells us anything, that won’t actually be the case. And Social Security recipients may unfortunately find themselves in a world of financial trouble in 2025.

This is not necessarily a function of a 2.5% COLAhowever. It’s more of a general problem that has been persistent for years, including periods when COLAs were much higher.

Social security beneficiaries continue to lose purchasing power

The reason social security Recipients may lose purchasing power in 2025 because the program’s COLAs have long failed to keep up with the cost of living. As of last year, Social Security benefits have lost 36 percent of their purchasing power since 2000, according to the Senior Citizens League. And a big reason for that comes down to a system failure.

Social Security COLAs are calculated based on data from the Consumer Price Index for Urban Wage and Service 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 that seniors on Social Security tend to face.

If the Social Security COLA were based on the Consumer Price Index for the Elderly, or CPI-E, instead of the CPI-W, it would likely allow benefits to do a better job of keeping up with rising costs. This is because the CPI-E would account for some of the expenses that are specific to Social Security recipients, such as health care. But until that change happens, seniors on Social Security may continue to struggle financially.

Don’t end up in a bad situation in 2025

Seniors may be worried about losing Social Security purchasing power in 2025. But the reality is that they are at risk even during times when COLAs are much more generous.

Seniors who are worried about being cash-strapped in the new year should look for ways to increase their income and reduce their expenses. Joining the gig economy is a great way to save money, and downsizing a home is a great way to cut expenses in a significant way. It might also be worth looking at different parts of the country where these benefits may go further.

Changes like these are certainly not easy. But they may be necessary until lawmakers find a way to more fairly calculate what Social Security COLAs should look like.