Social Security benefits are a lifeline for millions of Americans, particularly retirees. While some Social Security benefits can be accessed at any age, it’s the monthly Social Security income that most depend on during their retirement years. In 2024 alone, almost 68 million Americans will receive these payments, with retirees making up the majority. With no steady paycheck, this supplemental income is vital, especially for older adults, as 42% of women and 37% of men aged 65 and over rely on Social Security for at least half of their income.
Impact of Social Security
Even with Social Security benefits, many retirees are feeling the pinch of rising living costs. The average retiree spends around $2,984 per month, according to The Senior List, which is about $1,300 more than the average Social Security income. This financial gap leaves many older adults struggling, with 43% of retirees now more concerned about their finances than they were before retirement.
Amie Clark, co-founder of The Senior List, highlights some worrying trends:
- More than 50% of retirees live month-to-month.
- Over 25% regularly worry about affording basic necessities.
These figures underscore the financial strain on retirees, emphasizing the need for careful financial planning, even after retirement.
Cost-of-Living Increase
Thankfully, there’s good news for those receiving Social Security benefits: the Social Security Administration (SSA) has announced a cost-of-living adjustment (COLA). But how much can beneficiaries expect, and will it make a significant difference in their retirement budgets?
The COLA is designed to help beneficiaries keep up with rising living costs, adjusting benefits based on inflation. While this increase won’t cover all expenses, it does offer some relief for retirees dealing with higher prices for goods and services.
Understanding the COLA
The cost-of-living increase, or COLA, is meant to adjust Social Security payments to account for inflation. As Kevin Walton, a registered Social Security analyst, explains, “The COLA was introduced by Congress in the 1972 Social Security Amendments, with automatic annual adjustments starting in 1975. Before this, Congress had to pass special legislation to increase benefits.”
The COLA ensures beneficiaries receive predictable annual increases based on inflation. Stephen Kates, a certified financial planner, adds, “The Social Security COLA is calculated based on the consumer price index (CPI), ensuring benefits reflect the cost of essential goods and services.”
COLA is Calculated
Each year, the SSA calculates the COLA using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Specifically, it measures the percentage change in CPI-W between the third quarter of the current and previous years. If there’s an increase, the COLA is rounded to the nearest tenth of a percent and applied to Social Security benefits for the upcoming year.
For example, the 2025 COLA of 2.5% was determined by comparing the third quarter CPI-W average of 2024 (308.729) to that of 2023 (301.236). This adjustment ensures benefits rise alongside the cost of living, helping retirees manage inflationary pressures.
Social Security is a vital source of income for retirees, but rising living costs mean that many older Americans are struggling to make ends meet. The Social Security COLA provides much-needed financial relief by adjusting benefits in line with inflation. However, retirees must continue to plan carefully to ensure they can meet their financial needs in retirement. The cost-of-living increase is a welcome boost, but it’s crucial for beneficiaries to keep an eye on their expenses and make the most of their Social Security income.
FAQs
What is the Social Security COLA?
It’s a yearly increase in benefits based on inflation.
How is the COLA calculated?
It’s calculated using the CPI-W from Q3 of the current year.
Why is the COLA important for retirees?
It helps Social Security payments keep up with inflation.
When did COLA adjustments begin?
Automatic COLAs started in 1975 through the 1972 amendments.
How much was the 2025 COLA?
The 2025 COLA was 2.5%, based on inflation data from 2024.
