Anticipated Increase in Social Security Benefits for 2025, projecting Higher-than-Average Increases for Certain Retirees
Anticipated Increase in Social Security Benefits for 2025, projecting Higher-than-Average Increases for Certain Retirees
Last month, the Social Security Administration declared that beneficiaries will encounter a 2.5% increase in their living expenses coverage, referred to as the cost-of-living adjustment (COLA), in 2025. This announcement, however, left many Social Security recipients unsatisfied. A survey conducted by Our Website revealed that an astounding 54% of retired workers believe this 2025 COLA to be inadequate.
Understanding how these COLAs are calculated might help some Social Security recipients put the matter into perspective. This knowledge could make the outcome more understandable and in some cases, encourage retirees to evaluate the COLA in terms of dollars instead of percentage points. This perspective might even reveal that a portion of retirees will receive a higher than average increase in benefits in the upcoming year.
Let's delve deeper into the intricacies of calculating Social Security's cost-of-living adjustments (COLAs).
The formula for calculating Social Security's cost-of-living adjustments (COLAs)
Social Security's annual COLAs aim to preserve the buying power of beneficiaries' benefits from inflation, as tracked through a subset of the Consumer Price Index called the CPI-W. Here's a breakdown of the process:
- The Bureau of Labor Statistics releases monthly CPI-W readings, which indicate spending trends across eight primary product groups.
- The Social Security Administration calculates the average of the monthly CPI-W readings from the third quarter (July through September).
- The third-quarter CPI-W figure from the current year is divided by the corresponding figure from the previous year, and the resulting percentage increase becomes the COLA for the following year.
Considering the details, while the 2.5% COLA in 2025 marks the smallest increase in Social Security benefits in the past four years (3.2% in 2024, 8.7% in 2023, and 5.9% in 2022), this means that overall inflation is progressing at its slowest rate in four years.
Additionally, CPI-W inflation has been on a downward trend. It decreased to 2.4% in October, falling below the third-quarter average of 2.5%. If this trend persists, Social Security benefits are likely to lose purchasing power at a slower pace in the upcoming year, making the COLA more acceptable than initially expected for some retirees.
Some retired Social Security recipients will witness an above-average COLA in 2025
All retirees who receive Social Security benefits will benefit from the same 2.5% COLA in the upcoming year. However, the impact of this 2.5% increase in actual dollars will differ among individuals, depending on the size of their current payments. For instance, the Social Security Administration estimates that the average monthly benefit for retirees will grow from $1,927 to $1,976 following the 2025 COLA. This equates to an extra $49 in monthly benefits for the average retiree in 2025.
In light of the information provided, retirees who currently receive more than $1,927 in monthly Social Security benefits will also experience an above-average COLA in 2025, measured in absolute dollar terms. At the extreme end of the spectrum, someone currently drawing the largest allowable payout of $4,873 per month will receive an additional $122 in benefits in 2025, resulting in a monthly payment of $4,995.
For retirees unhappy with the 2025 COLA, consider expanding your income sources
It is worth noting that the insights presented above may not offer much assistance to retires struggling to make ends meet. Extra income can be a wise choice for these individuals to help offset the relatively modest COLA to be introduced in 2025.
Fortunately, interest rates have seen a surge, making high-yield savings accounts and certificates of deposit more attractive than ever. Furthermore, enthusiasm for artificial intelligence has sent the stock market soaring at a rapid pace. As a result, all three major U.S. market indexes are now within two percentage points of their all-time highs. This makes the present an appropriate time for some stock selling.
Retirees planning for their retirement finance might want to consider the formula used to calculate Social Security's cost-of-living adjustments (COLAs), as understanding this could help put the COLA increases into perspective and potentially encourage reevaluating the COLA in terms of actual dollars.
Despite the 54% of retired workers expressing dissatisfaction with the 2025 COLA, this percentage increase might be more manageable for some retirees if they take into account that overall inflation is progressing at its slowest rate in four years, as suggested by the decreasing CPI-W inflation.