Social Security’s Annual Adjustment – How It Will Impact Retirees’ Financial Security

With nearly 68 million Americans relying on Social Security benefits, the Social Security Cost-of-Living Adjustment (COLA) is vital to helping retirees manage rising living expenses. In fact, Social Security is the primary income source for many seniors, especially those aged 65 and older, with 42% of women and 37% of men in this age group relying on it for at least half of their income. Here, we’ll look into what the latest COLA means for retirees, how it’s calculated, and what you can expect in your Social Security check in 2025.

COLA’s Impact

Despite Social Security payments, many retirees face growing financial strain. Due to inflation, the cost of living has outpaced income growth for many seniors. According to The Senior List, the average retiree spends about $2,984 monthly, which is roughly $1,300 more than the average Social Security income. With 43% of retirees reporting increased financial worries post-retirement, managing this monthly shortfall has become more challenging.

Statistics from Amie Clark, co-founder of The Senior List, illustrate this financial stress:

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• Over half of retirees feel they’re living month to month.
• More than 25% frequently worry about covering basic needs.

Given these challenges, the COLA plays a critical role in helping retirees keep up with rising costs, offering annual adjustments to their Social Security benefits that can help close the gap between expenses and income.

Social Security

The COLA is designed to adjust Social Security payments based on inflation, making it a crucial safeguard for seniors against rising living costs. Congress introduced COLA in the 1972 Social Security Amendments, but automatic annual COLAs only began in 1975. Before this, benefits increased solely through special legislation.

Kevin Walton, a certified Social Security analyst, explains, “The COLA was established to make Social Security payments more predictable for recipients and to ensure that their benefits would adjust with inflation automatically.” Stephen Kates, a certified financial planner, further clarifies that the adjustment is applied to all recipients’ benefits annually, based on changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

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COLA

The SSA uses the CPI-W to determine the annual COLA, comparing the average CPI-W from the third quarter (July through September) of the current year to that of the last year a COLA took effect. Here’s a breakdown of how this process works:

1. Identify Third-Quarter CPI-W Averages: The SSA compares CPI-W figures from July, August, and September of the current year to the same period in the previous year.
2. Calculate the Percentage Change: The percentage increase in CPI-W is rounded to the nearest tenth of a percent, forming the basis of the COLA. If no increase is seen, no COLA is applied.
3. Apply the Increase: If there’s a rise in CPI-W, the SSA announces a COLA for the following year, with the increase reflected in January benefits.

For example, the COLA for 2025 was determined by comparing Q3 2024’s CPI-W average (308.729) to Q3 2023’s (301.236), resulting in a 2.5% adjustment. This figure reflects inflationary changes from the previous year and ensures retirees’ benefits are adjusted accordingly.

Retirees

For retirees, each COLA increment can make a noticeable difference in covering monthly expenses. Although the COLA is not guaranteed to fully offset inflation, it does provide some relief to seniors facing rising costs. Retirees should keep track of COLA announcements each year and consider how these adjustments affect their budgeting needs.

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While the COLA can help narrow the gap between Social Security income and expenses, retirees are encouraged to investigate additional retirement income options and carefully manage expenses. Financial advisors often suggest planning with a potential range of COLA increases in mind, rather than relying on them as a sole solution for cost-of-living increases.

Final Thoughts

The Social Security COLA is an essential adjustment that helps millions of retirees maintain purchasing power despite inflation. Although it doesn’t cover all retirement costs, the increase can alleviate some of the financial burden caused by rising prices.

Retirees are encouraged to monitor annual COLA announcements and consider them when planning budgets, especially during times of high inflation. With careful planning, the COLA can be a helpful component in ensuring a more stable retirement.

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