The Social Security Administration began issuing Cost of Living Adjustments (COLA) in 1975 to maintain the purchasing power of the payments. The adjustments typically mirror inflation rates, but years of inflation have kept consumer prices at an all-time high.
Now that inflation has been cooling for months, the administration announced that the 2025 COLA will be 2.5%, which is closely tied to the September 2024 Consumer Price Index release.
While payments will increase, many retirees are concerned Social Security payments aren’t growing enough to match the sustained high living expenses of housing, groceries, and healthcare.
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Most prices for consumer goods haven’t come down despite easing inflation, and economists note that deflation is unlikely to happen unless consumers spend less or a recession is on the horizon.
This disconnect between cooling inflation and sustained high prices has many consumers—especially retirees—worried as living expenses continue to rise and eat into household budgets.
What a 2.5% COLA means for retirees
The 2.5% COLA set for 2025 marks a four-year increase from the 1.3% COLA in 2021 due to low inflation during the COVID-19 era.
This update will increase the annual earnings limit for those at full retirement age to $62,160, up from $59,120 in 2024. It will also increase the maximum amount retirees below 67 can receive to $23,400, up from $22,320.
The maximum worker earnings subject to Social Security tax will also rise to $176,100.
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While 72.5 million Americans can expect their Social Security checks to increase next year, some argue that COLA should also consider heightened necessity prices since the rate of inflation does not paint the entire picture of the cost of living.
The cost of groceries has skyrocketed 28% since 2019, and overall retired household spending increased by 10.9% between 2021 and 2022 alone.
Some retirees live off withdrawals from 401(k)s and IRAs, only using Social Security payments to supplement their income. However, the Center on Budget and Policy Priorities found that 38.7% of retirees would live below the poverty line without Social Security payments.
The latest COLA update has some worried they won’t be able to make ends meet. Retirees may need to get strategic with spending and allocating their Social Security checks.
A couple is seen discussing finances.
How retirees can realistically manage expenses
Elizabeth Ayoola, a retirement expert at NerdWallet, shares some insights on the 2025 COLA and gives guidance on how retirees can make ends meet despite skyrocketing living expenses.
“Seniors are especially vulnerable to these cost of living increases because they may be out of the workforce and on tighter budgets,” she said. “The arguably underwhelming COLA increase for 2025 could mean seniors are forced to revisit their budgets to see where to cut costs. Seniors with no more wiggle room in their budgets may resort to returning to the workforce, relying on credit, or forgoing essentials to cope.”
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“Seniors have immediate needs to meet, so they must focus on what they can control,” she continued. “Right now, that may look like meticulous budgeting or even getting a part-time gig if feasible. It may also be worth speaking to a fee-only financial advisor to help streamline the process and develop tangible solutions to any financial stress.”
Ayoola notes that budgeting and strategic shopping may be the best tactics for retirees to monitor their cash flow and make immediate financial changes if needed.
“Budgeting will be major for retirees trying to weather the storm of higher cost of living,” she said. “Depending on their financial situation, they may need to shrink their discretionary spending bucket, which typically includes leisure activities like eating out, traveling, and shopping for non-essentials.”
“Other strategies may include optimizing their needs buckets by downsizing their accommodation, revisiting old school strategies like couponing to save on groceries and price comparison shopping to minimize utilities.”
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