For retirees, Social Security benefits are a crucial part of their financial security. However, the recent 2.5% increase in the cost-of-living adjustment (COLA) for 2025 may not be enough to keep up with the rising costs that many seniors face. While any COLA increase is welcome, many retirees are concerned that the current COLA formula is not adequately reflecting their actual expenses, particularly with costs for housing and healthcare continuing to soar.
In this article, we’ll break down how the 2025 COLA increase works, why it may not go far enough, and how retirees can plan for the future to ensure they’re making the most of their benefits.
The 2.5% COLA Increase: What You Need to Know
The 2.5% increase for 2025 is the smallest COLA bump in the past four years, marking a stark contrast to the 3.2% increase seen in 2024 and the record-breaking 8.7% increase in 2023. While the 2025 COLA provides retirees with a higher monthly check, the adjustment doesn’t fully reflect the inflation seniors face, especially in areas like healthcare and housing.
For most retirees, the average Social Security benefit will increase by about $49 per month. This is a helpful change, but it’s hardly enough to offset higher living costs. If you’re receiving Social Security, you can expect to see an average monthly benefit of $1,976 starting in 2025, compared to the $1,927 you were receiving in 2024. For those 70 and older, the maximum Social Security benefit increases by $122, bringing the total monthly benefit to $4,995.
However, for individuals who began claiming benefits earlier, at age 62 for example, their monthly increase is much smaller, just $68, bringing their total monthly benefit to $2,778.
Why the 2.5% Increase Doesn’t Cut It
Although the 2.5% increase sounds like a step in the right direction, many financial experts argue that it doesn’t come close to addressing the real cost of living for seniors. The COLA is tied to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which tracks inflation based on spending patterns that may not reflect the reality of what seniors spend their money on.
Seniors tend to spend more on healthcare and housing, two areas where inflation is significantly outpacing general inflation. According to Christine Coley, a certified financial planner, healthcare inflation in the U.S. has averaged more than 5% annually. Some experts even use a 6% rate to account for rising medical costs.
Additionally, housing prices and rental costs have been climbing, with no signs of slowing down. Home insurance rates are also increasing faster than inflation, which puts more pressure on seniors who are already struggling to keep up with basic expenses. These rising costs are particularly difficult for seniors on fixed incomes, as their Social Security checks are not keeping pace with their out-of-pocket expenses.
A Better Solution?
Many experts, including Shannon Benton from The Senior Citizens League, argue that it’s time for a major overhaul of the COLA system. Benton has long advocated for using the Consumer Price Index for the Elderly (CPI-E) to calculate Social Security benefits. The CPI-E reflects the spending habits of those aged 62 and older and would provide a more accurate picture of the actual inflation seniors face.
The current COLA system doesn’t take into account the increased costs of healthcare, which makes up a significant portion of seniors’ expenditures. Shifting to the CPI-E would help ensure that Social Security benefits better reflect the needs of older Americans.
Additional Changes to Social Security for 2025
In addition to the COLA increase, there are other changes coming to Social Security in 2025 that may affect your benefits. One of the most significant changes is the increase in the maximum taxable earnings amount, which will rise from $168,600 in 2024 to $176,100 in 2025. This means that higher earners will pay more into Social Security, but the increase is unlikely to affect the majority of seniors, who typically earn less than this threshold.
For those who have reached full retirement age, the earnings test exempt amount will increase from $59,520 in 2024 to $62,160 in 2025, allowing retirees to earn more before their Social Security benefits are reduced. However, for those still working and under full retirement age (between 62 and 66), the earnings test exempt amount will remain relatively low at $23,400 per year.
What Should You Do Next?
The 2.5% COLA increase is a mixed blessing for retirees. While it will provide a slight boost to benefits, it is not enough to offset the rising costs of essentials like healthcare, housing, and food. Financial experts encourage retirees to plan for these rising costs by reviewing their retirement savings and spending habits regularly.
- Review Your Social Security Timing: For those who haven’t yet begun taking Social Security, it may be worth consulting with a financial planner about the best time to begin benefits. Waiting until age 70 can significantly increase your monthly payment, providing more financial flexibility in later years.
- Consider Downsizing: If housing costs are eating into your budget, consider moving to a more affordable location or downsizing your home. This could help free up money for other expenses like healthcare or leisure activities.
- Supplement with Additional Income: Many seniors are turning to part-time work or remote jobs to supplement their income. This can help bridge the gap between Social Security and rising costs, particularly as many retirees are living longer and need extra funds to make ends meet.
- Focus on Healthcare: Be proactive about your healthcare costs. Review your Medicare plan regularly to ensure you’re not paying for unnecessary coverage. Look into Supplemental Health Insurance and Medicare Advantage plans to better manage your out-of-pocket expenses.
The Takeaway
The 2.5% COLA increase for 2025 provides a modest boost to Social Security benefits, but it likely won’t be enough to keep up with inflation, especially for seniors with significant healthcare and housing expenses. As costs continue to rise, it’s more important than ever to review your financial plans and make adjustments to ensure your retirement is secure. With a few strategic decisions and some extra planning, you can maximize your Social Security benefits and live comfortably in your retirement years.
