After months of waiting, the… Social Security Administration has officially confirmed a 2.5% cost of living adjustment effective January 2025. This annual increase will affect all Social Security payments for retirees, survivors, disabled and SSI recipients who are currently eligible for these monthly benefits. Seniors are used to receiving huge raises after three years. In 2022, 2023 and 2024, COLAs were 5.9%, 8.7% and 3.2%, respectively. Even if the official COLA for 2025 is lower compared to previous years, many retirees could still benefit because a smaller cost of living adjustment also suggests lower inflation.

Social Security confirmed the official salary increase for retirees for 2025

The purpose of Social Security’s annual cost of living adjustments is to ensure that payouts keep pace with inflation. Using a subset of the Consumer Price Index known as CPI-W, the Social Security Administration measures the cost of a basket of goods and services that reflect the usual expenses of an urban wage or salary earner. Specifically, the SSA compares the growth of the CPI-W in the third quarter of the year with the previous year. This increment becomes Cost of Living Adjustment (COLA) for next year. So the 2025 COLA will become official when SSA receives September CPI-W data on October 10.

Many argue that the CPI-W does not accurately reflect the spending of the majority of seniors. This means the COLA does not keep pace with seniors’ annual spending on goods and services. In reality it is Bureau of Labor Statistics has introduced a new CPI subgroup called CPI-E that calculates the cost of a shopping basket based on the spending habits of Americans age 62 and older. These are the households most directly affected by the Social Security COLA. Some have claimed that many retiree households will be able to maintain their quality of life if the COLA is changed to the CPI-E or another metric that better reflects seniors’ actual spending.

According to the Senior Citizens League, the average has increased since receiving the first payment in 2010 Social Security recipients Anyone who has been receiving payments since 2010 has suffered a 20% loss in purchasing power. However, a lower COLA could surprisingly benefit a large number of seniors, since COLAs are based on a measure of inflation – even if it’s arguably the wrong one.

A smaller increase in Social Security could also be a surprising benefit

Currently, many seniors do not rely solely on Social Security to cover their retirement costs. They saved and invested in their retirement accounts, 401(k) and taxable brokerage accounts. According to the latest status Federal Reserve Survey of Consumer FinancesAt the end of 2022, the median household with one person age 62 or older who had saved and invested over the course of their career had $200,000 in brokerage and retirement accounts. Based on stock market results, these holdings have likely increased significantly since then. There is no cost of living adjustment for these investments. They are subject to market forces. When inflation is low, all other things being equal, these investment accounts have higher purchasing power.

Conversely, when inflation is low, Social Security’s COLA is reduced but is theoretically expected to maintain purchasing power. A smaller COLA in 2025 could be significantly better for retirees who have saved a significant amount for their retirement. If the COLA stays low, you will have more purchasing power later. In the past, slower, more consistent inflation has typically been better for the overall purchasing power of Social Security checks, even if you depended on them to a significant extent. The Senior League found that Social Security’s purchasing power had increased in most years since 2010, when the COLA was less than 3%. Even with a 2.5% increase, purchasing power is expected to increase in 2019 as long as the Fed maintains its 2% annual inflation target.