Could next year see the smallest social security benefits hike since 2021? Here’s what you need to know.
Safeguarding against Inflation
The Social Security Administration traditionally calculates how much benefits would increase each year by providing cost of living adjustments (COLA). This is to account for inflation and protect the purchasing power of its beneficiaries.
Historical Low Ahead for COLA Rates
COLA rates are on track to make history as it is projected to be the lowest since 2021. The Senior Citizens League, a nonprofit advocacy group for senior citizens estimates the COLA rate to be around 2.63% for 2025. This estimate is based on recent inflation data from July.
COLA Rates Continue to Slide
A COLA rate of 2.6% is a significant drop from this year’s figures, which stood at 3.2%, and an even steeper drop from 2023’s 8.7%.
Historic Trend in COLA Increases
For three consecutive years since 2022, COLA rates have been higher than 2.6%. If 2025 estimates prove true, the year will make history as the first time in 32 years that COLA rates are at least 2.6% for four consecutive years.
Waiting on Official Figures
It is not set in stone yet as the Social Security Administration has not released official COLA figures. The SSA would need consumer price index data for the third quarter to do so. This data will be published on October 10 by the Department of Labor.
Predictions Close to Reality
Despite this uncertainty, predictions from groups like TSCL are typically accurate or close enough. So, with this estimate in hand, what does it mean for the average American retiree?
Lowest Adjustment Rate in Four Years
Given the recent trend, SS beneficiaries will receive their lowest COLA payments in four years. A cost of living adjustment rate of 2.6% translates to a $50 increase in monthly paychecks for the average retired American worker based on the current average benefits payment of $1,907.
Purchasing Power Slipping Away
A $50 increase is a far cry from the dollar amount required to protect the purchasing power of social security benefits against inflation.
Steady Decline in Dollar Value
Since 2010, social security benefits have lost 20% of their purchasing power according to a new study. A monthly increase of $370 (adjusted for inflation) is needed to make up for this loss in value.
Lower Adjustment Rates Due to Easing Inflation
The lower projected adjustment rates of 2.6% can be chalked up to easing inflation. Reports show that the consumer price index (CPI) rose 3.4% in May from a year ago.
American Seniors Feeling the Pinch
Though core inflation has been easing in recent months many seniors dependent on Social Security are still feeling the financial strain.
Medicare Premiums Set to Rise
Medicare Part B premiums are also expected to increase by 5.9% next year, equating to a premium increase of $185 per month.
Healthcare Costs Gobble Up COLA
For the millions of retired beneficiaries who are currently enrolled in and are dependent on Medicare, all of their monthly COLA — and then some — will be swallowed by increasing healthcare premiums.
The Real Impact of Inflation
This presents a significant problem for the majority of retired Americans who spend much of their benefits on necessities like shelter and healthcare. So even though inflation might be cooling, its impact continues to be felt harshly by the elderly.
Rising Poverty among Seniors
To make matters worse, poverty rates among American seniors are climbing. A recent survey reveals that half of Americans aged 65 and older are struggling to pay household bills. Rising costs, especially in healthcare and housing, are leaving many retirees in a bit of a pickle.
Certain States Get the Biggest Raises Next Year
In all of this, there is somewhat of a silver lining: Retired Social Security beneficiaries in certain states are set to see a little extra in their checks.
States with Bigger COLA Payments
States like New Jersey, Connecticut, Delaware, New Hampshire, Maryland, Michigan, Washington, Minnesota, Indiana, and Massachusetts, will see higher COLA payments in 2025 compared to other states.
Geography Matters
The reason for the higher benefit hikes in these states is geography. The SSA takes into account the total lifetime income, among other factors, when calculating cost of living adjustment rates.
High-Income States Get Bigger Payments
Of the 10 states listed, five of them rank among the highest median income in the US and three have an above-average median income. This translates to $54 in COLA increases — an additional $4 from the average $50 — for residents of these states.
Timing Also Matters
Another factor that can impact adjustment rates for retirees is when they choose to start claiming benefits. Workers who claim Social Security before reaching full retirement age will get smaller payments, while those who wait past their full retirement age will receive larger payments.
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Featured Image Credit: Shutterstock / J.J. Gouin.
The content of this article is for informational purposes only and does not constitute or replace professional financial advice.
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