The monthly benefit you start out collecting from Social Security won't necessarily be the monthly benefit you receive for life. That's because years ago, lawmakers decided that Social Security should be eligible for automatic cost-of-living adjustments, or COLAs.
The purpose of Social Security COLAs is to help seniors maintain their buying power as inflation drives the cost of living upward. Many seniors end up retiring on Social Security alone, so having a system in place for benefit increases is crucial.
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Right now, that system has Social Security COLAs tied to changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Of course, some lawmakers feel that the CPI-W should not be the basis for Social Security COLAs, since it doesn't accurately reflect the costs seniors face. Using a senior-specific index to determine COLAs would probably result in better Social Security raises for recipients.
Either way, you may be hoping for a pretty large COLA come 2025. But actually, that's not really something you should want.
Why generous COLAs aren't as good as you think they are
In 2023, Social Security beneficiaries got an 8.7% COLA -- the largest increase to arrive in decades. This year, Social Security's COLA was notably lower at 3.2%. And as of now, estimates for 2025 are calling for a 2.66% increase.
Of course, an official 2025 Social Security COLA announcement won't be arriving until October. That's because those raises are based on third-quarter readings from the CPI-W. So it's a bit premature to make assumptions about what next year's COLA will be.
But the reason you shouldn't want such a giant one is that larger COLAs mean higher living costs, since they're tied directly to inflation. In 2022, Social Security benefits may have gotten a seriously large boost, but back then, things like groceries and utilities were soaring to such an extreme degree that everyday people were struggling immensely to keep up.
If 2025's COLA comes in lower than 2024's, it's actually not a terrible thing at all, because it would mean that inflation has slowed down considerably. A slower pace of inflation could do more good for seniors' finances than a more generous COLA.
Try not to be reliant on COLAs
It's unfortunate that some seniors today rely on COLAs to keep up with their living expenses. That's a really restrictive way to live.
A better bet? Set yourself up with savings ahead of retirement so you're not just living on Social Security. That way, if there's a year when your Social Security COLA doesn't do its job, you won't be forced to cut back on essentials, like food and medication.
If you manage to put $300 a month into a retirement plan over 30 years and score an average annual 8% return in your portfolio, which is a bit below the stock market's average, you'll end up with about $408,000. You can then dip into that nest egg year after year to supplement your Social Security -- and make it so that COLAs aren't something to stress about.
