How much additional money will retirees receive from Social Security next year? We’ll know for sure in only a few weeks. The Social Security Administration (SSA) should announce the 2025 cost-of-living adjustment (COLA) on Oct. 10, 2024.
Although we’ll have to wait until then to know the exact amount of Social Security’s 2025 COLA, it will almost certainly be below average.
Here’s why that’s actually good news for retirees.
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Estimating what the 2025 Social Security COLA will be
Because of how SSA calculates COLAs, we can make a pretty good estimate of what it will be before Oct. 10. The increase will be based on inflation numbers from the third quarter of 2024 compared to the inflation numbers from the same period in 2023.
The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is the inflation metric used to calculate the Social Security COLA. We already know that the average CPI-W for the first two months of Q3 2024 is roughly 2.4% higher than the average for the entire third quarter of last year.
However, the COLA may be slightly higher if inflation somewhat accelerates in September. Social Security analyst Mary Johnson suspects that could be the case. She predicts a 2025 COLA of 2.5%.
Johnson’s former employer, The Senior Citizens League, is on the same page. The nonprofit organization also believes the 2025 COLA will be 2.5%. This would increase the average monthly benefit for retirees by $48.
Below average
If the actual 2025 COLA is 2.4% or 2.5%, it will be significantly lower than in recent years.
The increase for 2024 was 3.2%. In 2021 and 2022, the adjustment was 5.9% and 8.7%, respectively.More importantly, a 2025 COLA of 2.4% or 2.5% will be well below the historical average. Since automatic annual COLAs began in 1975, the average increase has been 3.8%.
However, that period includes years of exceptionally high inflation during the 1970s and early 1980s. Looking only at Social Security COLAs in the 21st century, the average increase was 2.6%. A Social Security adjustment of 2.5% would still be slightly lower than this average.
We should note, though, that the COLAs after the Great Recession have been abnormally low. In three of those years, Social Security beneficiaries didn’t receive an increase at all.
Why a below-average Social Security COLA is good news for retirees
Psychologically, a larger Social Security COLA might make many retirees feel better than a lower increase. However, there’s a strong case for why a below-average COLA is actually good news for retirees.
The key premise for this argument is the time value of money. Whatever the amount of the Social Security COLA, retirees receive the increase after they’ve already paid higher costs for products and services. But a dollar received next year will be worth less than a dollar spent this year because of inflation’s erosion of buying power.
The ideal Social Security COLA, therefore, is no COLA. This will happen only when there’s no inflation. From an objective financial standpoint, a low COLA is the next best thing to a zero COLA.
Many retirees probably won’t be happy that their Social Security raise is lower in 2025 than in previous years. But it’s smart to see the COLA for what it is — a delayed way to help make up for higher prices you’ve already incurred. Like in the game of limbo, the lower you go, the better you are.
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The post Social Security’s 2025 Cost-of-Living Adjustment (COLA) Will Almost Certainly Be Below Average. Here’s Why That’s Actually Good News for Retirees. appeared first on Retirely.