You’ll be happy to hear that your Social Security benefits will go up a little in 2025 because of a cost-of-living adjustment (COLA). It may come as a surprise, though, that the rise will be smaller than in previous years. As an example, the COLA adjustment was 3.2% in 2024 and a big 8.7% in 2023. This year’s increase will be less big.
The Social Security Administration said that the COLA for 2025 will be 2.5%. This means that people who receive Social Security will get about $50 more each month. This change is meant to help retirees and other beneficiaries deal with the rising costs of basic goods and services. However, it may not fully cover the overall rise in living costs because inflation is still a factor.
Small increase in Social Security benefits for 2025
This change will be made by Social Security during the last payment cycle of the year. Because of this, the increase will show up in payments for December 2024, which will be sent out in January 2025. SSI (Supplemental Security Income) payments from the federal government will also go up by 2.5% starting in January 2025.
How the COLA adjustment is calculated
The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) measures changes in prices during the third quarter of each year, from July to September. This is what the Social Security Administration uses to figure out the COLA.
This index shows how much prices have gone up since the third quarter of the previous year. The CPI-W tracks general inflation, but it might not be a perfect reflection of the real costs retirees face because it looks at how working people spend their money instead of retirees.
Why COLA doesn’t always reflect the real inflation for retirees
One big problem with the COLA formula is that it uses the CPI-W, which isn’t a good indicator of how retirees spend their money because they usually spend a bigger chunk of their income on healthcare.
This index measures inflation by looking at how much workers under 62 years old spend, which doesn’t always reflect how retired people spend their money. Costs for healthcare have been rising faster than the general rate of inflation, which is something that retirees tend to spend more of their income on.
Impact of medical costs on retirees
Medical costs have been rising faster than general inflation. In the past year, medical services have gone up by 3.6% and hospital services have gone up by 4.5%, while the overall inflation rate has been 2.4%. Younger people may spend about 7% of their income on medical costs, but older people may spend 15% or more of their income on healthcare.
As a result, even with the COLA adjustment, many retirees find their income doesn’t quite keep pace with rising healthcare expenses and other costs.
Even though most people would like their benefits to go up, a 2.5% increase might not be enough to cover the real cost of living, especially for people who depend on their Social Security benefits a lot. The small rise in the adjustment is due to the fact that inflation is slowing down overall. However, prices are still going up above average in some areas, like healthcare, which makes it hard for many retirees to keep up with their costs.
