2025 Social Security COLA: A Look at Changes in Retirement Income
One of the key components of Social Security is the annual cost-of-living adjustment, or COLA. As prices have risen for many goods and services in recent years, these adjustments have become crucial for retirees.
In October each year, the Social Security Administration (SSA) announces the new COLA based on inflation. For 2025, the adjustment will be 2.5%. This figure marks a significant drop from the increases seen over the past three years.
While some seniors may find this COLA disappointing, it’s useful to compare it to historical adjustments over the last quarter-century.
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Understanding the 2025 COLA in Context
Looking at COLA history since 2001, the 2025 adjustment is ranked as the 12th highest. Its 2.5% increase falls just below the 2.58% average over the past 25 years. The chart below ranks these adjustments from largest to smallest.
| Rank | Year | COLA |
|---|---|---|
| 1 | 2023 | 8.7% |
| 2 | 2022 | 5.9% |
| 3 | 2009 | 5.8% |
| 4 | 2006 | 4.1% |
| 5 | 2012 | 3.6% |
| 6 | 2001 | 3.5% |
| 7 | 2007 | 3.3% |
| 8 | 2024 | 3.2% |
| 9 | 2019 | 2.8% |
| 10 | 2005 | 2.7% |
| 11 | 2002 | 2.6% |
| 12 | 2025 | 2.5% |
| 13 | 2008 | 2.3% |
| 14 | 2004 | 2.1% |
| 15 | 2018 | 2.0% |
| 16 | 2013 | 1.7% |
| 17 | 2015 | 1.7% |
| 18 | 2020 | 1.6% |
| 19 | 2014 | 1.5% |
| 20 | 2003 | 1.4% |
| 21 | 2021 | 1.3% |
| 22 | 2017 | 0.3% |
| 23 | 2010 | 0% |
| 24 | 2011 | 0% |
| 25 | 2016 | 0% |
Data source: Social Security Administration.
Many retirees may feel that their expenses are increasing more sharply than the adjustments indicate due to the inflation calculation method. The SSA uses an index called CPI-W, which represents the costs for urban wage earners. Some believe that the SSA should utilize a different inflation measure, CPI-E, which better reflects spending patterns for individuals aged 62 and over. Using CPI-E, the COLA for 2025 would have been 3.0%, and it would have yielded a 4.0% increase for 2024. However, since the end of 2020, overall benefits might be slightly less under this approach due to lower projected increases in 2022 and 2023.
The Advantages of an Average COLA
Although the upcoming COLA is lower than in the past three years, it does offer some advantages that retirees may find beneficial.
The buying power of Social Security benefits is intended to remain stable since the COLA is designed to offset inflation. However, retirement savings outside of Social Security may not be as closely linked to inflation. In low-inflation periods, the purchasing power of retirement portfolios can be higher.
The S&P 500 saw a 24% rise in 2023 and has gained an additional 22% this year. Thus, the real value of retirement savings has increased significantly over the past two years. Moreover, greater stability from low inflation can reduce strain during market downturns, especially for retirees using a fixed withdrawal strategy. Lower inflation means withdrawal increases due to inflation will be limited.
Additionally, lower inflation can result in a reduced need for income in retirement, potentially minimizing tax obligations since Social Security tax thresholds do not adjust for inflation. This could allow retirees to retain more income for themselves or pass on more to their heirs.
In the broader context, the 2025 COLA presents several positive aspects for retirees.
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Adam Levy has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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