Retired individuals receiving Social Security will see a 2.5% increase in their benefits in 2025, amid ongoing struggles with rising costs of living. According to a Gallup survey, a record number of Americans identified inflation as a major financial challenge in 2024. Additionally, a study by the Employee Benefit Research Institute revealed that more than half of retirees are concerned about the need to make significant spending cuts due to inflation.
The announcement from the Social Security Administration (SSA) last week regarding the 2.5% cost-of-living adjustment (COLA) has become a critical topic among seniors. However, this adjustment comes with both disappointing news and a more concerning outlook.
The disappointing news: The 2025 COLA is below the average adjustment. While inflation is easing from the peak levels seen in 2022, many retirees continue to face financial hardships due to elevated prices following the pandemic. Data from the Schroders 2024 U.S. Retirement Survey highlights that less than half of retirees feel they have adequate savings, and nearly 90% are worried about inflation eroding the value of their assets.
Deb Boyden, Head of U.S. Defined Contributions at Schroders, noted that the rising prices at gas stations, grocery stores, and pharmacies have been particularly challenging for seniors on fixed incomes. The upcoming 2.5% increase in Social Security benefits is significantly lower than previous years, where retirees received a 5.9% adjustment in 2022, an 8.7% increase in 2023, and a 3.2% rise in 2024. This latest adjustment is also below the decade average of 2.8%, leaving many retirees in a precarious financial situation.
The more concerning outlook: Social Security benefits will experience diminishing purchasing power for the second consecutive year. The Senior Citizens League, a nonprofit advocacy group, estimates that benefits have lost 20% of their purchasing power since 2010 due to inadequate COLAs. This issue arises because the current COLAs are linked to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which does not reflect the spending patterns of retirees.
Experts suggest that COLAs should be adjusted based on the Consumer Price Index for the Elderly (CPI-E), which more accurately reflects the inflation experienced by those aged 62 and older, especially regarding housing and healthcare costs.
Comparing the actual COLA based on CPI-W to the hypothetical adjustment based on CPI-E for the last two years illustrates the disparity. If the COLA had been linked to CPI-E inflation, retirees would have seen a more significant increase in benefits. Consequently, the purchasing power of Social Security has declined for two consecutive years, with estimates suggesting a loss of 0.8% in 2024 and another 0.5% drop in 2025.
In terms of financial impact, the average retiree will gain an additional $49 monthly, equating to $588 per year. However, had the 2025 COLA been based on CPI-E inflation, the increase would have been approximately $58 per month, totaling $696 annually.
Nonetheless, retirement income still has room for potential growth. With current interest rates remaining high, retirees might consider investing in certificates of deposit (CDs) or high-yield savings accounts to improve their income returns. Additionally, given the stock market’s performance, selling stocks could also be a prudent option at this time.