If you first started claiming Social Security in the past couple of years, you’ve experienced something very different than those who retired and got their benefits before you. The annual Social Security benefits increases that came your way have been generous raises that gave you a good amount of extra money in your checks.
That trend may not continue forever, though. In fact, in 2025, you could be in for a shock when you see the size of the Cost of Living Adjustment (COLA).
The COLAs of recent years have been high by historical standards
For recent retirees, here are the benefits increases Social Security has provided each year:
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In 2024, benefits increased by 3.2% compared with the prior year.
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In 2023, there was an 8.7% benefits increase.
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In 2022, benefits jumped up by 5.9%.
So, if you first retired in 2021 or after, you’ve never seen a small COLA, much less a year without a raise at all. However, that’s not the standard when it comes to Social Security. In fact, between 2010 and 2020, there was just one year when the benefits increase topped 3.00%. And, recent retirees may find themselves facing a return to those lower raises in 2025 — which could come as a shock if they aren’t expecting such a small benefits bump.
Your COLA could be a disappointment next year
Now, the actual COLA that retirees will get in 2025 hasn’t yet been announced. The Cost of Living Adjustment is calculated by using data from the third quarter of the year, so the information needed to determine the raise Social Security recipients will get is not yet available.
However, the Senior Citizens League’s most recent projections suggest a 2.6% raise. This is a big jump up over their early predictions for next year, as TSCL originally estimated the raise would be just 1.75% when they made projections in January of this year.
The exact raise will depend on whether inflation is trending upward or downward. But a 2.6% benefits bump, or an even smaller one closer to that 1.75% projection, is going to come as a surprise to those who have gotten used to the much bigger increases of recent years.
Now, retirees shouldn’t necessarily be too upset about that, as a smaller COLA is indicative of the fact that inflation has slowed down. That’s because the COLA formula is designed to track cost increases so seniors maintain their buying power. Since inflation isn’t great for seniors who most likely also have money in a 401(k) or savings account, a slowdown in price increases isn’t a bad thing even if does come with a smaller raise.
Still, COLAs can be confusing, and those who don’t really understand how the formula works may be expecting their monthly payment to go up a good amount next year if that’s what they’re used to from the past couple of years. This could lead to disappointment and even budget issues without adjusting expectations. Recent retirees should learn now that COLAs are not going to stay at the level they’ve been in the post-pandemic era and should make sure they’re not anticipating extra Social Security money coming that they won’t get when the new year rolls around.
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Social Security Recipients Who Retired During the Pandemic Era Face a COLA Shock Next Year. Here’s Why. was originally published by The Motley Fool
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