Many seniors depend on their Social Security checks to provide a good portion of their retirement income. This is why cost of living adjustments (COLAs) are so important. COLAs are periodic benefits increases applied to Social Security benefits so they don't lose buying power. Without them, retirement checks would lose a bit of their value (and sometimes a lot of their value) each year as a result of inflation.
For the past few years, retirees have received generous COLAs, with benefits increasing 3.2% in 2024, 8.7% in 2023, and 5.9% in 2022. That's very likely to change next year.
In fact, projections for the 2025 COLA have been lower for a while, and retirees just got even more bad news about their benefit increase that's sure to lead to disappointment.
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The projected 2025 COLA just got smaller
In May, a nonpartisan advocacy group called The Senior Citizens League projected that retirees were on track for a 2.66% benefits bump in 2025.
However, the latest data shows TSCL revising their estimates downward based on the most recently available data. The League's June projection is that retirees are on track to get only a 2.57% raise next year. This is not just lower than the projections from a month prior, but it's also the smallest COLA in years.
Retirees who have gotten used to big benefits increases may be counting on their checks going up more than this amount next year and are likely to be unhappy about these new projections suggesting the raise they get is going to be smaller than anticipated.
Why is the COLA projection showing a smaller benefits increase?
The Senior Citizens League revised its estimates on how big the COLA will be in 2025 because new data came in. Specifically, May numbers were published by the Bureau of Labor Statistics that showed year-over-year changes on the Consumer Price Index for Wage Earners and Urban Clerical Workers (CPI-W).
While it may seem odd that this index affects COLA projections since most seniors aren't urban clerical workers and most retirees are no longer wage earners, CPI-W is the standard method of calculating COLAs. Specifically, third-quarter CPI-W data is used, which we don't have yet. The latest CPI data that is available for May, however, showed a 3.3% year-over-year change. This reflects a lower rate of inflation than was originally expected.
If inflation keeps cooling, then the relevant third-quarter data on CPI-W is likely to show a smaller year-over-year increase in costs than anticipated -- hence the change to COLA projections.
Some seniors may find that the difference between 2.66% and 2.57% isn't big. But, the important thing to remember is that this data shows patterns. If CPI-W keeps trending downward and reveals inflation isn't much of a problem, the COLA could continue to get smaller and seniors could find themselves with very little extra money coming from Social Security when 2025 arrives.
While a reduced rate of inflation is a good thing, a smaller check is bad news for those counting on getting a benefits boost similar to the ones they've received for the past few years. Retirees must be prepared for the fact that the bad news about their benefits increase will likely continue unless economic conditions change -- and they should start coming to terms with the fact their COLA will be the smallest in years.
