This Cost-of-Living Adjustment (COLA) is designed to help beneficiaries maintain their purchasing power amid rising inflation. However, the relatively low percentage has sparked concerns among retirees, many of whom feel the increase won’t be enough to meet the growing costs of basic needs and medical expenses.
In 2024, the COLA was set at 3.2%, but rapid inflation in the first quarter of the year outpaced that adjustment, leaving many retirees struggling to keep up with actual costs. Now, with a lower COLA for 2025, beneficiaries fear the new increase won’t sufficiently offset their additional financial burdens.
Retirees and the Cost-of-Living Adjustment
The COLA calculation is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). It compares the average CPI-W from the third quarter of the current year to the same period the previous year. For 2025, this formula produced a modest 2.5% increase.
To put this in perspective, the average retirement payment in 2024 was approximately $1,924.35 per month. A 2.5% increase translates to an additional $48.11, raising the average monthly payment to about $1,972.46. For beneficiaries receiving lower payments, the increase will be even smaller, potentially leaving them struggling to cover basic necessities.
Is the COLA enough for retirees?
A key issue with the COLA lies in the fact that retirees’ expenses don’t always align with the index used to calculate the adjustment. For example, medical costs—a significant portion of most seniors’ budgets—rose by 3.8% over the past year. This discrepancy has led many to advocate for using a more targeted index, such as the Consumer Price Index for the Elderly (CPI-E), which better reflects the spending patterns of older adults.
The CPI-W often underestimates retirees’ needs because it gives more weight to categories of expenses that are less relevant to seniors. As a result, many beneficiaries receive increases that fail to keep up with their actual cost increases, leaving them in a financial bind.
Why some retirees will see less money
Although the COLA technically increases Social Security payments, many retirees will see a smaller net gain due to rising Medicare Part B premiums. These premiums are deducted automatically from Social Security payments, reducing the amount beneficiaries receive each month.
On November 8, 2024, the Centers for Medicare and Medicaid Services (CMS) announced that the standard Medicare Part B premium would increase by $10.30 per month in 2025, bringing it to $185. This increase will directly reduce the net impact of the COLA on beneficiaries’ income.
For instance, a typical beneficiary receiving an additional $48.11 per month from the COLA will see that gain shrink to $37.81 after the new Medicare premium is deducted. In some cases, this represents a 20% reduction in the expected increase.
The impact on higher-income beneficiaries
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Retirees with higher incomes will face an even greater challenge. While their Social Security payments are larger, their Medicare Part B premiums also increase based on income. As a result, these individuals may see a disproportionately smaller net benefit from the COLA, further straining their finances.
For many retirees, the 2.5% increase in Social Security benefits will provide limited relief against inflation. At the same time, rising Medicare premiums will further reduce net benefits, raising concerns about retirees’ ability to afford essentials like food, housing, and medical care.
These ongoing challenges highlight the need to revisit how the COLA is calculated and explore policy changes that better reflect retirees’ financial realities. For now, beneficiaries should watch for notifications from the Social Security Administration in December 2024 to get precise details on their updated payments and plan accordingly.
While 2025 will bring financial difficulties for many retirees, it also underscores the importance of continued efforts to build a system that more effectively addresses their needs.