In 2022, the United States experienced the most significant inflation in four decades, primarily due to macroeconomic disruptions and supply chain issues following the COVID-19 pandemic. This led to an 8.7% cost-of-living adjustment (COLA) for Social Security beneficiaries in January 2023, the largest increase since the early 1980s. However, despite this, many retirees continue to struggle financially, as revealed by the 2024 Retirement Confidence Survey conducted by the Employee Benefit Research Institute.
Lack of Confidence and Inflation Concerns
The survey found that over a quarter of retirees lack confidence in their ability to live comfortably in retirement, with inflation cited as the primary reason for this lack of confidence. Additionally, more than half of retirees expressed concerns about having to make significant spending cuts to cope with rising prices.
Given these challenges, retirees are eager to know how much their benefits will increase in 2025. The Senior Citizens League recently updated its forecast for the 2025 COLA, shedding light on the potential impact on retirees.
Determining Social Security COLAs
Social Security’s annual COLAs are determined by the inflation rate in the third quarter of each year, specifically from July through September. The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is used to measure this inflation, tracking a basket of prices reflecting the spending patterns of these workers. The percentage increase in the CPI-W during the third quarter determines the following year’s COLA. For instance, the 3.2% COLA applied in 2024 reflects the 3.2% increase in the third-quarter CPI-W in 2023.
Revised Forecast for 2025 COLA
The Senior Citizens League has revised its forecast for the 2025 COLA multiple times based on inflation data. The forecast has increased from 1.4% in January to 2.7% in May, indicating a potential rise in Social Security benefits. If this forecast holds true, the average retiree’s monthly benefit could increase from $1,915 in April 2024 to $1,967 in January 2025, providing an extra $51 per month or $612 for the year.
Impact on Buying Power
However, the potential 2.7% COLA might not fully compensate for the loss of buying power caused by inflation in 2024. The average CPI-W through the first four months of 2024 was 3.2% higher than the same period in 2023. If the full-year CPI-W increases more than the third-quarter CPI-W in 2024, Social Security benefits may lose some buying power in 2025. This could result in retired workers feeling like they have less money despite the cost-of-living increase.
Personalized Social Security Strategy
All of this is to say that Social Security COLAs may not be the quick fix for inflation protection that you thought. However, that doesn’t mean that Social Security strategy can’t be a key part of your income and inflation protection plan… remember, you have options. To figure out how to get the most out of your Social Security strategy, reach out to us today.
https://www.fool.com/retirement/2024/05/31/social-security-cola-forecast-2025-good-bad-news/
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