Social Security is a huge source of income for many. In fact, about 1 in 5 U.S. citizens receive Social Security every month. The annual Cost-of-Living Adjustment (COLA) promises a welcome increase in these benefits, aiming to keep pace with inflation and ensure purchasing power doesn’t erode. But the reality might not be as rosy.
While COLA will likely increase in 2025 (and practically every other year), it may not keep pace with rising inflation. This factor could potentially leave retirees with stagnant or even declining purchasing power.
Of course, nothing is set in stone yet. We’ll take a look at the most likely COLA scenario for the next increase and analyze how it might stand up in today’s economic situation.
The Allure of a COLA Increase
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For Social Security recipients, the annual COLA increase serves as a beacon of hope. This adjustment is designed to automatically raise Social Security benefits to account for inflation, the gradual increase in prices for goods and services.
Inflation can silently eat away at the value of a fixed income. What your $20 bought last year probably won’t cut it this year! Luckily, the Social Security Administration (and Congress) knows this, so COLA was put into place to help Social Security keep track of inflation.
In simpler terms, a COLA increase translates to bigger monthly Social Security checks. The average monthly benefit currently is $1,907. If the COLA is 3%, that would raise the average benefit by $57 a month. That isn’t a lot, but it can help with groceries.
This increased income is typically well-received by retirees who rely heavily on Social Security. But it often isn’t enough. If your grocery bill alone jumps by $100 a month, an extra $57 still isn’t enough, especially when you consider that everything jumps in price, not just groceries!
The Inflationary Sting
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COLA is around because of inflation, so it’s important to understand inflation’s impact.
Inflation is the sustained increase in prices for goods and services over time. For example, if you bought a gallon of milk for $3 last year and now it costs $3.50, this seemingly small difference represents inflation eroding the purchasing power of your dollar.
It’s the same amount of money buying less.
If you’re on a fixed income, there is no way to counteract these price increases.
Annual inflation doesn’t increase steadily, either. Some years, the inflation rate is as high as 10%. In other years, it’s as low as practically 0 (or even negative). On average, it’s about 3.3% annually. Currently, inflation rates in the US are around 3.4% annually—down from the over 9% rate in 2022.
Despite current rates seeming pretty good, inflation is still running rampant!
The COLA Gap: Is It Enough?
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The COLA’s effectiveness hinges on whether it can truly keep pace with inflation. Here’s where things get a bit complicated. While COLA adjustments aim to match inflation, it is not possible to consider every senior’s actual experience of inflation.
Here’s what we mean. Inflation isn’t the same everywhere. Prices for items depend on where you are. But COLA is the same nationwide. It doesn’t account for seniors who may live in places where inflation is felt faster.
COLA is also based on the Consumer Price Index, which considers price increases for items the average household is likely to buy. However, seniors aren’t necessarily the “average household.” For instance, they tend to spend more on health care and prescription medications than the average household, and the prices of these items can rise faster than annual inflation.
If seniors are spending a larger portion of their income on healthcare and the healthcare prices are increasing faster than the average inflation rate, COLA isn’t keeping up with what seniors need to purchase.
The Double-Edge Sword
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Let’s be clear: any increase is better than no increase. COLA provides a welcome boost to Social Security and helps seniors float a little higher. However, an inadequate COLA adjustment is still inadequate.
It’s like the water levels rising three feet and the floor only rising two feet. Sure, the floor almost matched the water levels, but that doesn’t make you drown less.
When COLA falls short, real seniors cannot afford basic necessities like food and housing. Seniors may need to choose between eating healthy and affording their prescriptions. Many retirees are on a fixed income, relying almost solely on COLA to keep pace with inflation.
The rising cost of living can deplete savings faster, limit their ability to cover medical expenses and force them to delay retirement plans.
Even if you aren’t retired, you should be concerned about COLA and inflation. After all, if COLA doesn’t keep up now, your purchasing power when you retire will be lower. It’s important to understand Social Security to properly plan your retirement.
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