For millions of Americans, Social Security is an essential lifeline during retirement. The annual cost-of-living (COLA) is designed to help beneficiaries escape the effects of inflation by providing an annual increase that matches inflation. However, this theory doesn’t always work out well in practice. 

The prospects of the 2025 COLA have cast a long shadow and become a matter of debate. Soaring inflation has caused the downsides of the COLA system to be felt more dramatically. As inflation soars, more and more seniors are finding that COLA isn’t enough. 

Social Security’s projected 2025 cost-of-living adjustment (COLA) falls short of addressing the escalating financial burdens faced by retirees, potentially exacerbating economic hardship for millions of Americans.

Here’s a quick rundown of 2025 COLA for those in a hurry:

• The annual Social Security cost-of-living adjustment (COLA) is intended to safeguard retirees from inflation, but it often falls short. The projected 2025 COLA is particularly worrisome as it may not adequately offset increasing living costs.
• The shortcomings of COLA disproportionately impact vulnerable populations, such as low-income seniors, people with disabilities, and those with chronic illnesses. These groups heavily rely on Social Security, and inadequate adjustments can result in severe financial hardship.
• The current COLA calculation might not accurately reflect the spending of older adults, who tend to spend more of their income on healthcare and housing. 
• Seniors without significant savings or investments are impacted the most, as they don’t have another source of income to lean on. If you’re currently planning for retirement, we highly recommend reading our free report on “2 Dividend Legends to Hold Forever” so that you aren’t reliant on COLA adjustments. 

The Projected 2024 COLA

The Social Security Administration determines the annual COLA based on changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The SSA uses data from the third quarter of the previous to the third quarter of the current year. That means that for the 2025 COLA, the SSA is using data from the third quarter of 2023 to the third quarter of 2024. 

For more on how this works, take a look at our Social Security guide. 

While the exact percentage for the 2025 COLA hasn’t been released as of yet (as it depends on the final CPI-W data), early estimates suggest a modest increase. This is in contrast to the substantial 8.7% COLA granted in 2023, which was the largest adjustment in decades. This anticipated smaller increase could indicate a slowdown in inflation. 

However, others debate that the COLA calculation method is not accurate. The CPI-W doesn’t track all inflation. Instead, it tracks inflation for items that “urban wage earners and clerical workers” buy. Of course, this typically means families with children, not seniors. The data doesn’t always reflect the spending patterns of older adults. 

Historical Perspective on COLAs

It’s important to back up and look at the 2025 COLA from a historical perspective to fully understand it. Since automatic COLAs were introduced in 1975, Social Security beneficiaries have experienced a range of adjustments, from minimal increases to substantial boosts.

For instance, the early 1980s witnessed some very large COLA jumps, as that era had high rates of inflation. The latter part of the 20th and early 21st centuries had much smaller adjustments, as inflation rates were lower. There wasn’t any increase in 2010, 2011, and 2016 due to the very low inflation.

However, in recent years, COLA has increased substantially. 2022 and 2023 were some of the biggest increases in decades, as inflation soared very high. The projected 2025 figure represents a return to more typical levels, so the increase isn’t odd in the least. That said, many are concerned about the rising economic challenges for retirees and that the data may not properly represent the financial experience of seniors today. 

Rising Cost of Living for Retirees

While Social Security’s COLA aims to mitigate the impact of inflation, the reality is that the cost of living for retirees often outpaces these adjustments. Seniors spend differently compared to your average family, which is what COLA is currently based on.

For instance, seniors tend to spend more on healthcare, which tends to outpace inflation. In the past few years, pricing for nursing homes and hospital-related services has specifically risen steadily. 

Additionally, the cost of housing, including rent and home maintenance, has also increased. Seniors tend to spend a bigger chunk of their income on housing than working families. 

Groceries and other goods have also risen steadily, of course. However, these are accurately included in COLA. 

COLA also includes some items that seniors tend to buy less of, like clothing. Seniors don’t usually have growing children or larger families, so they have fewer people to buy clothing for. 

The Gap Between COLA and Actual Costs

The disparity between the projected 2025 COLA and the actual cost of living increases for retirees is a growing concern. While the COLA aims to provide some relief, it often falls short of offsetting the full impact of inflation on seniors’ budgets.

This gap is a real concern that impacts real retirees. According to the National Council on Aging, more than 17 million older adults over 65 are economically insecure, meaning their incomes are 200% below the federal poverty line. These retirees often have a hard time purchasing groceries, medication, and housing. 

It’s not that these individuals aren’t able to go on vacations or enjoy expensive hobbies. It’s that they are forced to choose between their heart medication and insulin.

If COLA doesn’t keep up, seniors may have an even harder time paying for essentials. Other seniors may suddenly find themselves eligible for government assistance programs, which can strain those programs. 

 The Impact on Vulnerable Populations

The consequences of the COLA shortfall are particularly severe for vulnerable populations within the retiree community. Low-income seniors, those with disabilities, and individuals with chronic health conditions are disproportionately affected by rising costs. Not all seniors will feel the impact severely, but for many, even a small decrease in spending power can mean the difference between filling their prescription and going without. 

About half of the retired population receive at least 50% of their income from Social Security, and about a quarter receive almost all of their income from Social Security. That means that a decrease in Social Security’s buying power seriously impacts many seniors, as they don’t have any other income to fall back on. 

Individuals with disabilities often face higher living expenses due to specialized equipment, medications, and caregiving needs. A COLA that fails to keep pace with inflation can exacerbate financial hardship for this population, limiting their ability to live independently and participate fully in their communities.

Some individuals with disabilities may be forced to take advantage of other government programs or stop living independently. These impacts further exuberate the strain on the welfare system as other government programs pick up the slack from COLA. 

Seniors with chronic health conditions are impacted similarly, as they often have high healthcare costs. If COLA doesn’t cover the healthcare costs, they may be forced to try and stretch their medication. 

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