Social Security cost-of-living adjustments (COLA) were instated in 1975 to keep pace with inflation and help retirees maintain purchasing power. However, many people argue that the adjustments aren’t enough to keep pace with the rising cost of necessities such as housing, groceries, and utilities.
Annual COLAs are calculated using the Consumer Price Index (CPI) figures from the previous year to closely tie the adjustments to inflation. The September CPI — announced in October — is the last update factored into the calculations, making it a highly anticipated figure.
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Bob Powell, CFP and editor of Retirement Daily, has a few predictions for the 2025 COLA, which will be announced shortly after the September 2024 CPI release.
He notes retirees are feeling the squeeze as consumer prices have remained high, and the recent Fed interest rate cut will likely impact investment yields.
Inflation has become a growing concern for retirees
Powell explains that the next CPI update will be a key indicator of the 2025 Social Security COLA.
“The next CPI report comes out in October, and then shortly thereafter, the Social Security Administration will announce what the cost of living adjustment will be,” he said. It will likely be low, I’m guessing maybe around maybe 3% or so.”
Although inflation is cooling, prices have not come down, adding an extra financial challenge for Americans of all ages.
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“Whatever your social security benefit was the previous year, it will be adjusted upwards by that 3%,” he explained. “Some folks are saying that 3% isn’t enough to offset the cost of living — they’ll still be behind the eight ball even with the adjustment. And I would say, by and large, that that might be true because you’re probably spending more than you did in previous years.”
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Lower interest rates are another issue for retirees
Powell notes the stubborn inflation rates are becoming more of a challenge for retirees, as there hasn’t been an inflationary period of this magnitude in decades.
“For many years, Social Security beneficiaries have benefited from the zero interest rate policy world — COLAs were low, but CPI was low as well,” he continued. “With the exception of the past few years, retirees haven’t had to worry about inflation much. The adjustments were low, but so were consumer prices.”
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“There’s a Consumer Price Index that looks at the cost of living for those 62 and older, and that shows that it’s roughly equal to the standard CPI,” he added.
Retirees are finding their expenses are outpacing their retirement savings, and Social Security isn’t as impactful as it once was.
“To me, it’s a double-edged sword. On one hand, when you have high inflation, you typically have high interest rates, which benefits the people investing in CDs and money market funds,” he elaborated. “On the other hand, high inflation hurts people because their income may not rise as fast as their expenses.”
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