Most years, retirees get a Social Security cost-of-living adjustment (COLA). This increases the amount of their monthly benefit. In January of this year, the Senior Citizens League (TSCL) projected retirees were on track for a 1.4% increase in 2025.
That estimate has changed, though. At first glance, it may seem that the shift in direction is a positive one for retirees. However, that may not actually be the reality. Here’s why.
Retirees may get a bigger Social Security raise than anticipated
Although the COLA projections in January showed seniors would be getting only a small benefits increase in 2025, the most recent estimates from the TSCL from March of this year tell a very different story. Based on the most recent update, the latest projections for the 2025 COLA are coming in at 2.6%.
If those estimates pan out, older Americans are going to see their benefits jump by substantially more than originally expected. In fact, the typical retiree receiving an average monthly benefit of $1,907 will see around $22 extra in each monthly check with a 2.6% raise.
Don’t get too excited about the bigger COLA
The reality is, a bigger raise is not something to be happy about. And when you look at the big picture, it’s clear why getting one could portend financial trouble for many retirees.
TSCL is basing its estimate on data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). CPI-W is a price index that’s used to measure how costs are changing for urban wage earners and clerical workers. It measures year-over-year price adjustments on a basket of goods and services.
Social Security’s annual COLA is calculated based on how much the costs of these consumer goods have changed. Specifically, third-quarter CPI-W data is used in this calculation, which obviously isn’t available yet. But TSCL has taken a look at year-to-date numbers as well as projections on inflation when estimating how big the COLA will be.
Originally, most experts believed inflation would cool this year, so a smaller benefits increase was anticipated. But with the most recent March CPI data showing costs were up 3.5%, things are not trending that way. Continued high inflation is likely to mean CPI-W will show prices are up enough year over year that retirees need a 2.6% benefits bump to maintain their buying power.
Sadly, while COLAs give seniors more Social Security benefits, the rest of their savings don’t increase. And if inflation is still high enough to justify the larger-than-anticipated COLA, retirees could find their savings losing ground as prices keep soaring.
Inflation isn’t good for people with a lot of money saved, especially retirees who need to maintain relatively conservative investment portfolios since it won’t be long before they need their funds. So a higher COLA is not a good outcome for them. They may struggle to maintain their standard of living if the return they get on savings and investments outside of Social Security isn’t enough to cover rising costs.
Now, the COLA for next year hasn’t been determined yet. And retirees can’t personally do anything to change it, except hope the third-quarter CPI-W isn’t so bad. What they can do, though, is be realistic about what a big benefit increase would mean for them and make any necessary adjustments to their budget to avoid spending their savings too fast, even as inflation remains higher than most would like it to be.
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Are Retirees on Track for a Pleasant Surprise When It Comes to Their 2025 Cost-of-Living Adjustment? The Answer May Not Be What You Think was originally published by The Motley Fool
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