Dark clouds may be gathering on the horizon for Social Security recipients. While early forecasts suggest a potentially modest Cost-of-Living Adjustment (COLA) in 2023, these predictions are shrouded by economic uncertainty.
The Federal Reserve Bank of New York currently puts a chance of a recession before March 2025 at over 50%. Inflationary pressures raise concerns that a modest COLA increase might not be enough to weather the financial storm facing many retirees.
Of course, not everything is straightforward, especially since the official COLA increase hasn’t been announced. We’ll look at the potential issues posed by a lower-than-expected COLA and see how COLA could impact retirees’ purchasing power.
Why Does It Matter?
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The COLA plays a direct role in the size of every Social Security check. While COLA typically only increases everyone’s benefit by a few dollars, that adds up over time. If COLA is lower than expected, beneficiaries may struggle financially.
Understanding the COLA (Cost-of-Living Adjustment)
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The COLA is a critical component of how Social Security works. This adjustment helps retirees maintain their purchasing power in the face of rising prices. Its main purpose is to counteract inflation.
Inflation is the rise of prices over time. Inflation is almost always around, which means that prices are almost always rising. As inflation eats away at the value of money, a fixed income (like that provided by Social Security) slowly loses its ability to buy anything. The Social Security Administration uses COLA to bridge this gap and ensure retirees can still afford their basic necessities.
The COLA is represented as a percentage. This percentage is how much Social Security payments will grow. For instance, in 2024, the COLA was 3.2%. Therefore, everyone’s Social Security benefits rose by 3.2%. Generally, this works out to only a few dollars. However, those few dollars add up over time!
COLA is calculated based on the Consumer Price Index for Urban Wage Earners (CPI-W), which tracks the average price change of common goods and services (Think food, housing, healthcare, etc.). The SSA uses the CPI-W data from the third quarter of the year to calculate the COLA for the next year.
For instance, 2024’s COLA was calculated using the July, August, and September 2023 CPI-W data.
If the CPI-W shows a positive increase from the previous year’s data point, the COLA reflects that increase as a percentage. This percentage is then applied to the existing Social Security benefit amount to determine the new benefit amount.
If the CPI-W shows a decrease or remains stagnant (which happens rarely), there is no COLA increase. But Social Security benefits don’t decrease, either.
While the CPI-W serves as a reliable benchmark, it doesn’t perfectly reflect spending patterns in retirees. Retirees are not your average family. They tend to spend more on healthcare, for instance. Some argue that a different index, like the Consumer Price Index for the Elderly (CPI-E), which tracks inflation for seniors, might be a more accurate measure for COLA calculations.
It’s important to remember that COLA is also necessarily predictive. The previous year’s data are used to attempt to predict inflation. However, predictions are hardly ever perfectly accurate!
Why Might the 2025 COLA Be Lower?
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Several factors converging raise concerns about a lower-than-expected COLA for 2025. Let’s take a look at each one:
Economic Uncertainty and Inflation
The Federal Reserve is actively working to curb inflation by raising interest rates. While this is necessary to control rampant inflation, it can dampen price increases in the short term. Potentially, this could lead to lower inflation data in 2024, leading to a lower COLA in 2025.
However, this doesn’t necessarily consider long-term inflation. If interest rates are lower in 2025, inflation could speed up again, making COLA inadequate.
As the introduction discusses, the current economic climate suggests a possible recession in or before 2025. During a recession, economic activity slows down, decreasing demand and prices for goods and services. If this occurs before the 2025 COLA is calculated, it could lead to a lower-than-expected COLA.
Early Forecast and Historical Comparisons
Organizations like The Senior Citizens League track economic indicators and make predictions about the COLA. These aren’t official announcements, but they can provide insight into what retirees can expect. Currently, these organizations are largely predicting a small COLA increase.
The Senior Citizens League reports that the 2025 COLA could be as little as 1.75%. For reference, it’s typically closer to 3.2%. However, it’s impossible to get an accurate measurement until the latter part of the year.
Historical Inadequecy
Due to the inadequacy of COLA, Social Security benefits have yielded more than 30% of their purchasing capacity since 2000. Largely, this is because COLA is measured using the Consumer Price Index for Urban Wage Earners (CPI-W).
Seniors are not urban wage earners, so this index does not track their spending patterns accurately.
Many people argue that the Consumer Price Index for the Elderly should be used instead. Currently, this index shows inflation at 20% higher than the CPI-W does. That’s not a ton, but over thirty years, it turns into a lot!
For example, if the CPI-E had been implemented thirty years ago, the average senior would receive an additional $14,000 per year.
Potential Issues with a Lower-Than-Expected COLA
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If COLA is lower than expected, it can raise real problems for real people. The core purpose of COLA is to maintain purchasing power for retirees. If COLA fails to accurately predict inflation, retirees will not be able to afford what they could in the previous year.
Everyday essentials like groceries, housing, and utilities may no longer be affordable, forcing retirees to make hard choices.
Many retirees rely mostly on Social Security benefits. A lower COLA can impact their financial security. Retirees may need to cut back on groceries, healthcare, or housing. Some may put off surgeries and doctor appointments.
Retirees with sizeable savings may run through those savings more than expected, leading to financial issues years from now.
Those who aren’t retired yet may be forced to postpone retirement. Some retirees may have to re-enter the workforce to make up for their diminished income.
Rising housing costs coupled with a stagnant COLA pose a serious problem for some retirees. They might choose to downsize, move in with family, or face potential eviction.
Healthcare costs also tend to rise faster than inflation. A lower COLA could make it harder for retirees to afford essential medications, co-pays, or additional medical services.
The impact of COLA isn’t equally distributed, though. Those already struggling financially are the most vulnerable to COLA adjustments. The cost of living also varies significantly around the country. Retirees living in areas with higher inflation might experience a larger impact from a lower COLA.
Strategies for Retirees to Manage a Lower COLA
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givThe prospect of a lower-than-expected COLA in 2025 can be unsettling for retirees. However, proactive planning and strategic adjustments can help mitigate the impact.
Budgeting
Prioritize essential spending on housing, food, and healthcare, and look for ways to reduce discretionary spending on entertainment, dining out, or subscriptions. Make sure you know where your money is going and understand that inflation doesn’t affect everything equally.
Don’t hesitate to contact service providers like cable companies or even insurance companies to negotiate lower rates. Some may offer discounts for seniors.
Look for cheaper alternatives whenever possible.
Government Assistance Programs
If COLA is not enough, some seniors may need to rely on other government assistance programs. For instance, SNAP can help low-income retirees afford healthy groceries. There are often programs for electricity and water, too.
Medicare can help retirees cover health costs, which tend to rise faster than other expenses. Medicare Savings Programs can help those who qualify to afford premiums, deductibles, and co-pays.
Optimize Healthcare Costs
Healthcare rises in cost faster than most other expenses. Ensure you stay on top of your Medicare insurance and review your coverage yearly. You may qualify for more or different coverage if the COLA is lower than expected.
Don’t be afraid to negotiate medical bills with providers, either. Many hospitals will offer a discount if you ask!
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