The Social Security Administration has announced the smallest Social Security benefit increase for 2025. Starting next January, Social Security checks will show a Cost of Living Adjustment (COLA) of only 2.5%. A small margin of error is due to continued declines in inflation, and lower prices for other goods and services. However, 2.5% is a big drop compared to the record increase of 8.7% that was given in 2023 when inflation rises strongly.
The 2.5% COLA is close to the Average Increase Over the Last 20 Years
The 2.5% bump is slightly lower than the 2.6% average increase seen over the past 20 years, but much smaller than the long-term average. Over the past 47 years, the average COLA has averaged 3.7%.
The estimated increase for 2025 may sound inadequate, especially if prices are still starting to stabilize.
The maximum and minimum COLA increases
Since 1975 when COLAs were introduced, the highest Social Security COLA was 14.3% in 1980, but that was an anomaly. The only times the COLA was at or above 8% were in 1975 (8%), 1979 (9.9%), 1981 (11.2%), and 2023 (8.7%).
Also, it is interesting to note that there have been 3 years with 0% increase (2010, 2011, and 2016).
Will a 2.5% Increase Be Enough to Maintain Quality of Life?
This year’s COLA could be helpful. However, recent data from The Senior Citizen’s League (TSCL), an advocacy group, found that 80 percent of nursing homes in a 2024 survey reported that their monthly budget for essentials such as food, housing, and prescription drugs had increased over the years. 12 ago. months, and 63% say they are worried that their income will not be enough to cover these basic expenses in the coming months.
Also, because of the way the COLA is calculated (see below), previous increases have not kept pace with rising Medicare and other retirement costs.
“Ensuring that seniors have enough to feed themselves and house themselves with dignity is a big reason why we oppose the minimum COLA of 3%,” said Shannon Benton, Executive Director of TSCL. “TSCL research shows that nearly two-thirds of seniors rely on Social Security for more than half of their monthly income, and 28% rely on it entirely.”
Medicare Costs Will Determine Actual Impact of COLA Increase
A 2022 study from Mary Johnson, an analyst for the Senior Citizens League, found that over the past 21 years, COLAs have increased Social Security benefits by 55 percent but housing costs have increased by nearly 118 percent and health care costs have increased by 10 percent. 145 in the same period.
And, this year is no different. Fidelity’s annual cost of care survey found that out-of-pocket health care costs for people age 65 and older will increase 5% by 2024. This makes the increase in health care costs twice as much as the COLA.
And, since health care makes up a large percentage of a senior’s budget, the difference can be huge.
How Much Will Social Security Payments Increase With This COLA?
Social Security benefits vary greatly depending on when you start benefits and your earnings levels over the course of your working life. However, on average, the spike will boost retirees’ monthly payments by more than $50.
The Social Security Administration says it will begin notifying people of their new benefit amount by mail starting in early December. If you have a personal Social Security account before Nov. 14, you can view your COLA notification online.
Are There Any Opposites to a Modest COLA Increase?
It may seem like big increases in Social Security benefits are good news and small increases are bad. However, larger checks are intended to help retirees keep pace with inflation. Also, inflation is not really good news for anyone.
Time to Update Information on Your Retirement Plan
It’s a good idea to always keep your retirement plans up to date with any changes in your financial situation. This news may cause you to reevaluate your Social Security benefit amount and your inflation projections.
Social Security Benefit Amount
If you’ve already started Social Security, you may want to review your COLA projections in the Boldin Retirement Planner.
Inflation
Because of inflation, everyone should check their Social Security COLA assumptions, general inflation, housing appreciation, and medical inflation in the Boldin Retirement Planner.
How Social Security Cost of Living (COLA) is Calculated
The first increase in the Social Security COLA was in 1950. It took an act of Congress, and profits increased by 77%. Two other acts of Congress in the 1950s brought the total increase to 125% above its initial level by the end of the decade. From 1950 to 1975 the COLA was increased by one act of Congress nine times.
In 1973 a law was passed that stipulated that Social Security benefits would keep pace with inflation, and the first annual automatic COLA increase was in 1975. The Social Security Act specifies that COLAs are determined based on increases (not decreases) in the Consumer Price Index. Index of Urban Wage Earners and Clerical Workers (CPI-W).
The Social Security Administration uses average CPI-W data from July, August, and September of the previous year and compares it to the same period of the current year. A two-digit percentage change is a COLA increase.
Does the way Social Security COLAs are calculated penalize retirees?
As the name suggests, the CPI-W measures the increase in the cost of the types of things urban workers typically buy. The problem with applying this measure to Social Security is that retired adults spend money very differently than the majority of workers. Most notably, seniors spend more money on health care than the general population.
To make matters worse, health care costs tend to rise much faster than most other goods and services. Various measures show that health care costs have increased by 3% to 12% each year over the past decade. And seniors spend a larger portion of their income on health care than the average worker.
According to the Senior Citizens League, “Suppressed growth in Social Security benefits not only creates ongoing benefit adequacy problems for retirees, but also Medicare budget problems where the COLA is insufficient to cover rising Part B premiums for a large number of beneficiaries.”
Alternatives to the CPI-W for calculating the Social Security COLA have been proposed, including something called the R-CPI-E “Retirement Price Index for Older Americans.” This method of calculating inflation especially for people over age 62 was authorized by the Older Americans Act of 1987, but has never been used to update the Social Security COLA.
How to Make Sure You Have Enough Money for Retirement
Social Security is only designed to cover a portion of your retirement income. It is almost (but not necessarily) impossible to live on Social Security alone.
Here are 4 things you should do to make sure you have enough income for retirement, despite the 2022 Social Security increase:
1. Count All Sources of Retirement Income
You’ll want to think about how you’re going to withdraw the money and/or earn it from savings and whether or not you have a pension, income, or retirement plan.
2. Estimate Your Retirement Expenses
How will your spending habits change during retirement?
3. Check Inflation
Ronald Reagan said, “Inflation is as violent as a robber, as intimidating as an armed robber, and as deadly as a hitman.” And, it’s true. Inflation will make any money you have worthless. This is one of the reasons why predicting and accounting for inflation correctly is so important to your future financial security.
4. Protect Yourself from Other Dangers
Inflation isn’t the only unknown that can wreak havoc on your retirement savings. You also need to plan for longevity, health care emergencies, natural disasters, and more.
Build Social Security Income Estimates for Your Retirement Plan
Sound complicated? It doesn’t have to be like that.
The Boldin Planner is an easy-to-use but very detailed tool that will tell you if you have enough income for retirement. You can set different levels of spending and income for different stages of retirement.
You can even set your own inflation rates – one for general spending, another for housing, and medical expenses can also be specified separately. Try different amounts for each category and see how much they impact your financial health in retirement.
Source link
