One of the most important aspects of Social Security is that recipients are eligible for a cost-of-living adjustment (COLA) every year. These annual increases are designed to help seniors and those receiving Social Security benefits keep up with inflation. 

While there is supposed to be an annual increase yearly, this hasn’t always been the case. While the first cost-of-living increase began in 1975, there have been at least three years without one, which has undoubtedly harmed seniors’ buying power. 

What Is the Cost-of-Living Adjustment? 

Any annual cost-of-living adjustment will affect almost all of the current 72.5 million Americans set to withdraw from Social Security in 2025. Those benefiting from any increase can look back to 1975 when the Social Security Administration first received approval to increase benefit payouts to reflect the current cost of living in the United States. 

The 2.5% increase from 2024 to 2025 slightly dropped from 2024, when benefits increased by 3.2 percent. Any increase is intended to ensure that the effects of inflation do not erode the purchasing power of Social Security benefits. 

The benefit increase will begin in January, and it’s roughly equivalent to an extra $48 per Social Security recipient per pay period. This brings the average check sent to Social Security recipients to around $1,968 monthly. 

How Is The Cost of Living Adjustment Figured? 

According to the Social Security Administration, any increase is based on legislation enacted in 1973, which established a formula to increase the cost-of-living adjustment. The Social Security Act and its formula are based on increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers. 

The COLA used for the following Social Security benefits for 2025 would have been based on the percentage increase in the CPI-W from the third quarter of 2024. This formula tracks price changes on groceries, public transportation, and healthcare while weighted for urban wage earners and clerical workers. 

If the Social Security Administration sees a rise in CPI-W, it applies this percentage to adjust benefits for the following year. For example, had the CPI-W risen by 5% in the third quarter of 2024, it would have provided an extra $100 to a beneficiary currently receiving $2,000 in benefits. 

Has There Always Been A COLA Increase? 

Unfortunately, there have been a few years without an increase in the CPI-W, so there hasn’t been a cost-of-living increase in COLA for Social Security benefits. Since 1975, this has only occurred three times: 2009, 2010, and 2015. Lower inflation rates overall were considered to have resulted in no COLA increases during these three years. 

Historical Overview of Cost-of-Living Adjustments 

1975 – 1982

According to the Social Security Administration, the biggest Social Security COLA increases of all time came during this period. Driven by stagflation and the energy crisis, 1980 was the single most impacted year, and due to double-digit inflation rates, it saw a record-breaking 14.3% COLA increase. During this period, retirees were slammed with giant price increases on utilities like gas and heating and essentials like food. 

2008-2009

As a result of the 2008 financial and mortgage crisis, a hefty 5.8% increase in COLA was applied in 2009, the most significant increase that Social Security benefits had seen since 1982. This was said to have resulted from the sharp increases in essentials like food and energy costs that were skyrocketing during the recessionary period the US was undergoing. 

2023

In 2023, the COLA increased massively by 8.7% yearly, the highest the Social Security Administration had reported in over 40 years. This was directly tied to post-pandemic inflation, which saw massive increases in food, energy, and healthcare costs. These were major contributors to rising inflation, which had already seen a 5.9% increase in 2022. 

Economic Factors Affecting the Cost-of-Living Adjustment

High Inflation 

The single biggest factor affecting any COLA increase is high inflation. For this reason, the 1970s and 2020s, when high inflation was rampant, were among the years that saw the most considerable COLA adjustments to help seniors keep pace with rising costs worldwide. 

In the 1970s, rising energy costs and the oil crisis saw a cost surge for homeowners and families. The global supply chain disruption brought on by the COVID pandemic in the 2020s was equally responsible for driving up prices on not just basics like gas and groceries. Additionally, a microchip shortage led to an increase in prices for large and small electronics, as well as cars, smartphones, and televisions. 

Recessionary Periods

Another major economic factor contributing to the COLA is any period of recession. This is generally viewed as a period when essential goods and services become more expensive while salary increases stagnate. The last major instance was in 2008, brought on by the housing crisis. It saw the price for essentials like healthcare and utilities skyrocket. 

Retirees, in particular, felt this healthcare cost more than most as it came against a fixed income. Premiums for things like Medicare rose faster than the cost-of-living adjustment, reducing the buying power of those already on a fixed net income. 

Long-Term Retirement Planning

Plan for Variances

Considering inflation’s impact on a fixed income, planning for inflation variances is essential. Consider that what $1,000 could buy you in the year 2000 vastly differs from what $1,000 would buy you in 2025. Without COLA, retirees relying on a fixed income like Social Security would struggle to afford the rising costs of essentials like food and healthcare. 

Retirees must work with a qualified financial advisor and try to anticipate high and low inflation periods. By doing so, a budget should have some flexibility, which would help reduce concerns over purchasing power. 

Diversifying Income Streams

Diversifying income streams should be one of the most critical factors that can significantly impact retirees’ purchasing power. This could mean that alongside Social Security benefits, it’s important to look into annuities or investment dividends that could provide a stronger sense of financial security when the Social Security Administration issues low COLA increases. 

Save for Healthcare

As healthcare costs tend to be one of the biggest unknown spends during retirement, saving more for healthcare is essential. The challenge is that in many cases, any COLA increase is quickly used by increases in Medicare costs, leaving retirees with a still fixed income to purchase foods and other essentials that are also seeing price increases. 

The result is that anyone looking at long-term retirement savings now should build in a larger buffer with healthcare savings. This goes for Medicare and any private medical expenses that might need to be considered, such as long-term care due to a serious medical condition. The more you can set aside pre-retirement for this scenario, the less likely you will be impacted by inflationary expenses.

 

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