The annual cost-of-living adjustment (COLA) is designed to help retirees keep up with inflation. However, the 2025 COLA is the smallest in years and falls short of covering rising costs. Here’s what retirees need to know about how this impacts their finances in February and beyond.
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COLA Formula
Since 1975, Social Security benefits have been adjusted yearly based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). This index tracks inflation based on goods and services commonly used by retirees, such as food, housing, and transportation.
The COLA is determined by comparing the average CPI-W for the third quarter of the current year (July-September) with the same period from the previous year. The percentage increase is then applied to Social Security benefits.
For 2025, the CPI-W inflation rate was 2.5%, meaning Social Security checks increased by the same percentage starting in January. However, this adjustment is already proving inadequate as inflation continues to rise.
Inflation
While a 2.5% COLA may seem reasonable, inflation has been climbing. CPI-W inflation increased from 2.2% in September to 2.8% in December. Since the COLA was calculated before these increases, it does not fully account for the latest inflation trends.
This means retirees are facing higher expenses this February, with their benefits not stretching as far as expected. If full-year CPI-W inflation for 2024 reaches 2.9%, retirees will effectively lose purchasing power despite the COLA increase.
Underestimations of Inflation
This isn’t the first time the COLA has failed to keep up with inflation. In 2023, CPI-W inflation was 3.8%, yet Social Security benefits only increased by 3.2%.
Over the past two years, retirees should have received a cumulative 6.8% increase to match inflation, but they only received 5.8%. This shortfall translates to financial losses. For an average retiree receiving $1,905 per month, the difference means they are missing out on $228 annually.
Inflation Over Time
| Year | COLA Increase | CPI-W Inflation | Shortfall |
|---|---|---|---|
| 2023 | 3.2% | 3.8% | -0.6% |
| 2024 | 2.5% | 2.9% (estimate) | -0.4% |
| Total | 5.8% | 6.8% | -1% |
Because Social Security adjustments react to past inflation rather than predict future costs, retirees are constantly struggling to keep up. This pattern leads to a gradual decline in financial stability.
Cope
As living expenses rise, retirees may need to explore ways to supplement their income. Some possible strategies include:
- High-yield savings accounts: With interest rates still elevated, these accounts offer a safe way to earn additional income.
- Money market funds: These investments provide stable returns and are currently offering attractive yields.
- Dividend stocks: Investing in blue-chip stocks with consistent dividend payouts can generate additional income.
- Part-time work: Some retirees may consider remote or freelance work to help bridge the financial gap.
While these strategies won’t completely offset the shortfall caused by insufficient COLAs, they can help mitigate financial strain.
With Social Security benefits lagging behind inflation, retirees will need to stay proactive in managing their finances. Alternative income sources will be key to maintaining financial security in 2025.
FAQs
What is the 2025 COLA increase?
The 2025 Social Security COLA is 2.5%, based on CPI-W inflation.
Why is the COLA increase so low?
It was calculated before inflation picked up in late 2024.
Does COLA fully cover inflation?
No, inflation rose to 2.8% by December, reducing buying power.
How does COLA affect retirees?
It helps but often lags behind real inflation, reducing benefits.
How can retirees offset rising costs?
They can use savings, investments, or part-time work for extra income.
