Unfortunately for most retired Americans, the latest projections for the next Social Security benefit increase may not be as expected. According to the latest COLA projections for 2025, the new increase could be a big disappointment for beneficiaries because, compared to other years, increases could potentially be quite lower.
It is not a lie that most seniors rely on their Social Security benefit payments as their primary source of retirement. For this reason, cost-of-living adjustments, or COLAs, are crucial. To maintain the purchasing power of Social Security benefits, COLAs are periodic increases in payments. In the absence of them, inflation would cause retirement payments to lose some, or even a significant amount, of value annually.
In recent years, retirees have greatly benefited from cost-of-living adjustments (COLAs), with Social Security benefit payments increasing by 3.2% in 2024, 8.7% in 2023, and 5.9% in 2022. However, that trend is likely to change next year. Long-term projections for the 2025 COLA are lower, and retirees have recently received even more unfavorable news about their Social Security benefit increases, which is guaranteed to cause dissatisfaction. In May, for example, the Senior Citizens League, a nonpartisan advocacy group, predicted that retirees would receive a 2.6% benefit increase in 2025.
However, according to the latest statistics, the Senior Citizens League (TSCL) has revised its projections downward in light of the most recent data available. According to the league’s June forecast, retirees are likely to receive an increase of just 2.57% in 2025. This is the weakest COLA in years, not just lower than the estimates from a month ago. The fact that these revised projections imply that retiree increases will be smaller than expected is likely to anger many who have grown accustomed to large benefit increases and may be expecting more than that in their checks next year.
Impact
A lower COLA for 2025 means that Social Security benefit increases will be lower, and overall beneficiaries will have less money to keep pace with inflation and cover their living expenses. A smaller COLA for 2025 is possible based on the Senior Citizens League’s updated estimates. In May, the Bureau of Labor Statistics released data specifically showing year-to-year changes in the Consumer Price Index for Wage Earners and Urban Clerical Workers (CPI-W).
Moreover, since most retirees are no longer wage earners and most seniors are not urban clerical workers, it may seem strange that this index influences COLA projections; yet, the CPI-W is the traditional approach used to calculate COLAs. In particular, third-quarter CPI-W data—which we do not yet have—is utilized. However, the most recent available CPI statistics for May indicated a 3.3% change from the previous year. This indicates that inflation has decreased below what was first anticipated.
Trends
The revision to the COLA projections is due to the possibility that the relevant CPI-W data for the third quarter could show a lower-than-expected year-over-year increase in prices if inflation continues to fall. The difference between 2.57% and 2.66% may not seem like much to some seniors.
However, it is important to remember that this data shows trends. Seniors may find themselves with very little more money coming from Social Security in 2025 if the CPI-W continues to trend lower, indicating that inflation is not much of an issue.
Finally, don’t forget that a lower inflation rate is a welcome thing, but for individuals who were hoping for a benefit rise akin to what they have been getting for the past few years, a smaller check is terrible news. Retirees need to start accepting the idea that, barring a turnaround in the economy, the negative news regarding their benefit rise will probably not end and that their COLA will be the lowest in years.
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A tax law expert with a knack for breaking down complex regulations into digestible insights. Ehsteem's articles on the tax news blog offer invaluable guidance to readers navigating changes in tax legislation.
