The Social Security Administration announced on Thursday that the cost-of-living adjustment (COLA) for 2025 will be 2.5%, a decrease from the 3.2% adjustment in 2024. This is the smallest increase since 2021.

This new 2.5% adjustment will take effect in January for approximately 68 million Social Security recipients. This means the average monthly payment will increase by $50, rising to $1,957 from $1,907 in January 2024.

Additionally, around 7.5 million recipients of Supplemental Security Income (SSI), which assists disabled individuals and low-income seniors, will see their increase starting on December 31.

The annual COLA is intended to protect beneficiaries’ purchasing power against inflation. However, many older Americans have expressed concerns about this. In an AARP survey conducted with 1,000 adults aged 50 and over, 83% indicated that a COLA of less than 3% would not be adequate.

Mary Johnson, an independent analyst specializing in Social Security and Medicare, noted, “Even with the average retiree benefit increase of $50 per month, it might only cover the cost of about 14 gallons of gasoline at current prices or groceries for just a few days.”

Understanding the COLA Calculation

The COLA is determined based on the percentage change in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from July to September of the previous year compared to the same months in the current year. While CPI-W measures general inflation, it may not perfectly reflect all economic changes.

As of September, the annual CPI-W had an increase of 2.2%, which is lower than the overall inflation rate of 2.4%.

Challenges of Inflation and COLA

Johnson highlighted that the CPI-W does not accurately represent the spending habits of retirees.

The CPI-W focuses on inflation experienced by working adults under 62, missing the perspective of older adults, who tend to spend more on healthcare. Research shows that younger workers spend about 7% of their budget on healthcare, while older adults often dedicate 15% or more of their income to medical expenses.

Healthcare costs are increasing more rapidly than general inflation. From September of the previous year, medical care services rose by 3.6%, and hospital care costs climbed by 4.5%, outpacing the overall inflation rate of 2.4%.

Jo Ann Jenkins, AARP’s CEO, stated, “This past year, inflation has had a significant financial impact, particularly on retirees who often rely on Social Security for income. Despite this adjustment, many older Americans may still struggle to meet their financial obligations. For 40% of older Americans, Social Security is their primary income source.”

According to the Census Bureau’s supplemental poverty measure report, seniors aged 65 and older are the only demographic that has seen an annual rise in poverty rates since 2020. This measure accounts for cash and non-cash benefits while factoring in essential costs like taxes and healthcare expenses, along with regional differences in housing costs.

The percentage of seniors living in poverty increased to 14.2% in 2023, up from 14.1% in the previous year, 10.7% in 2021, and 9.5% in 2020. This represents the highest rate since 14.5% in 2016.

Jenkins emphasized the need for further action to secure Social Security for older Americans.

Americans can improve their retirement savings by investing in a company 401(k) plan or both Roth and traditional IRAs, while it’s also vital for Congress to strengthen Social Security, say experts.

Mike Lynch, a retirement planning authority and managing director of Applied Insights at Hartford Funds, remarked, “The Social Security Administration has clearly stated that if reforms aren’t implemented soon, complete benefits for retirees might not be sustainable in the future. Our political representatives need to act accordingly.”

Former President Donald Trump has suggested eliminating taxes on Social Security benefits, which has become a popular notion among voters, according to the Wall Street Journal. The proposal has garnered support from over 80% of voters. As reported by the SSA, around 40% of Social Security beneficiaries currently pay taxes on their benefits.

“This concept sparks a crucial and broad conversation regarding possible solutions,” Lynch noted. “Regardless of whether it becomes a reality, the proposal signals that the future of Social Security is being actively discussed.”