You’ll be happy to hear that your Social Security payments 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 rise 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 prices of basic goods and services. However, it’s possible that this change won’t fully cover the overall rise in living costs, since inflation is still having an effect on many areas of daily life.
Small increase in Social Security benefits for 2025
This change will be made by Social Security during the last payment run of the year. Because of this, the raise will show up in payments for December 2024, which will be sent out in January 2025. SSI (Supplemental Security Income) benefits 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 measure 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 seniors spend their money because they usually spend a bigger chunk of their income on healthcare.
This index tracks 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
The cost of medical care has been rising faster than the rate of inflation. In the past year, medical services have gone up by 3.6% and hospital services by 4.5%, while the rate of inflation as a whole has been 2.4%. Medical costs may take up about 7% of a younger person’s budget, but older people may spend 15% or more of their income on healthcare.
As a result, many retirees find that their income doesn’t quite keep up with rising prices like healthcare. This is true even after the COLA adjustment.
Most people would like their benefits to go up, but a 2.5% increase might not be enough to cover the real cost of living, especially for people who depend on their Social Security payments a lot.
The moderate 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 seniors to keep up with their costs.
Outlook for the coming years
Social Security will probably keep looking at the COLA every year and making changes based on how the economy is doing. The increase in Social Security benefits this year may not be as big as some people had thought, but it is still meant to help recipients in a small way.
In the future, there may be talks about changing the COLA calculation so that it better matches how seniors spend their money, especially on health care.
In conclusion, the 2025 COLA increase is smaller than those in recent years, but it will still help beneficiaries keep their buying power when the prices of basic goods and services change.
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