Last big update on the 2025 COLA – To be announced Thursday, and this is what the experts are saying

One week before the official Cost of Living Adjustment (COLA) for Social Security in 2025 is announced, experts have issued their final estimates. COLA aims to protect retirees from inflation by ensuring benefits maintain purchasing power. This annual adjustment is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), calculated by the Bureau of Labor Statistics each October. The official announcement is scheduled for October 10.

Expected COLA Increase in 2025

Following a historic 8.7% increase for 2023, Social Security beneficiaries saw a more modest 3.2% increase in 2024. Analysts, including Mary Johnson, an independent Social Security policy expert, project a further decrease in 2025, estimating the COLA at approximately 2.5%. For a typical beneficiary receiving $1,870 per month, this would translate into an additional $46.80 per month, a modest boost that may still fall short of covering rising costs.

Comparisons to Recent COLA Increases

If the estimated 2.5% COLA holds, it would be the lowest since 2021. While this is close to the historical average (about 2.6% over 20 years), the comparatively low increase could be challenging given that essential living costs continue to rise. Essentials such as housing, food, auto insurance, and maintenance expenses have all seen significant increases, with inflation affecting many retirees disproportionately. Johnson notes that while the 2.5% increase is roughly in line with historical norms, it may struggle to keep up with the rapid rise in the cost of goods and services impacting retirees.

Kristin Petersmarck, CEO of New Horizon Retirement Solutions, echoes the 2.5% estimate, suggesting that it aligns with the recent cut in interest rates and long-term COLA trends. However, not all experts are in agreement—retirement specialist Burt Williamson of PlanPrep suggests that the COLA might reach 3%, driven by fluctuating energy prices and the likelihood of winter energy cost increases. According to Williamson, a COLA below 3% could fail to meet retirees’ growing financial needs.

The Real Impact of a Smaller COLA

While a smaller COLA reflects the recent moderation in inflation, its impact on retirees will become clearer as actual costs fluctuate throughout 2025. Robert Brokamp, senior retirement adviser at The Motley Fool, points out that the effectiveness of the 2025 COLA won’t be fully understood until the year’s end, when inflation data becomes available. If inflation remains low, a 2.5% adjustment could reasonably maintain retirees’ purchasing power. However, if inflation rises unexpectedly, the adjustment could fall short, affecting those on fixed incomes.

Rising Costs in Key Sectors Could Outpace COLA

Several sectors are seeing cost increases that could potentially outpace the anticipated COLA. According to Brandy Burch, CEO of Benefit Bay, expenses like healthcare, housing, and utilities—costs particularly relevant for retirees—have outpaced CPI-W inflation metrics. For example, shelter costs have risen by 5.2% from August 2023 to August 2024, and medical prices have climbed by 3.2%. Since these expenses typically account for a large share of retirees’ budgets, a modest COLA may fail to cover the full rise in costs for these critical services.

Burch highlights that while the upcoming increase is a positive step, it may not suffice for retirees facing rapidly rising essential costs. The added income from a 2.5% adjustment may help, but it could fall short of covering expenses that strain daily budgets, from healthcare to housing.

The Balance Between Inflation and Benefit Adjustments

While many retirees are accustomed to adjusting their budgets to accommodate economic shifts, balancing rising costs with fixed income remains challenging. If inflation stays moderate in 2025, a 2.5% COLA might effectively cover most routine expenses. However, should unexpected increases in essential costs arise, the COLA may not offer the support needed by many on Social Security.

Retirement experts are cautious, emphasizing the need for beneficiaries to budget carefully. While COLA aims to maintain purchasing power, individual expenses can fluctuate, often outpacing adjustments. As Social Security recipients prepare for the announcement, awareness of inflation’s varying impact on personal expenses will be crucial in managing finances effectively.