Many retired workers are grappling with the financial pressures of rising prices. Gallup reports that in 2024, a record number of Americans identified inflation as a major source of financial hardship.
A survey from the Employee Benefit Research Institute reveals that over half of retirees fear they will need to make substantial cuts to their spending just to keep up with inflation.
With these challenges in mind, the 2025 cost-of-living adjustment (COLA) for Social Security has become a critical concern for many seniors.
Last week, the Social Security Administration (SSA) announced that benefits will increase by 2.5% next year. However, for retirees and other Social Security recipients, this news comes with both bad and worse news.
The Bad News: Below-Average COLA for 2025
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Although inflation has eased from the heights reached in 2022, many retirees continue to feel the impact of the price increases that followed the pandemic. For example, the 2024 U.S. Retirement Survey by Schroders found:
- Fewer than 50% of retired workers feel they have saved enough for retirement.
- Nearly half of all Americans report that their retirement expenses are higher than expected.
- A staggering 90% of retirees worry that inflation will reduce the value of their savings.
As Deb Boyden, Head of U.S. Defined Contributions at Schroders, pointed out, “Whether it’s a trip to the gas station, grocery store, or pharmacy, prices in the U.S. have increased noticeably in recent years, and that is particularly challenging for retirees living on fixed income sources.”
The 2.5% COLA for 2025 pales in comparison to recent years: 5.9% in 2022, 8.7% in 2023, and 3.2% in 2024. Additionally, the 2025 increase will fall below the 10-year average of 2.8%.
Given the larger increases seen in previous years, many retirees already struggling financially may be disappointed by this below-average adjustment.
The Worse News: Social Security Benefits Will Lose Buying Power for the Second Straight Year
According to the Senior Citizens League, Social Security benefits have lost 20% of their purchasing power since 2010 because COLAs have not kept pace with inflation.
One major reason for this shortfall is that COLAs are tied to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which tracks inflation based on the spending habits of younger, working-age individuals.
These individuals tend to spend money differently from retirees, with a smaller emphasis on healthcare and housing—two categories that weigh more heavily on retirees—and a larger focus on education and transportation costs.
The Case for Tying COLAs to CPI-E
Many experts advocate for linking Social Security COLAs to the Consumer Price Index for the Elderly (CPI-E), which tracks inflation based on the spending patterns of people aged 62 and older.
CPI-E is believed to more accurately reflect the spending habits of Social Security recipients by placing greater importance on housing and healthcare.
If Social Security COLAs had been tied to CPI-E inflation instead of CPI-W, benefits would have seen larger increases over the last two years.
As a result, benefits have lost buying power in both 2024 and 2025. Specifically, Social Security benefits lost 0.8% of their value in 2024 and will lose another 0.5% in 2025 based on the differences between CPI-W and CPI-E.
To put this into perspective, after the 2025 COLA, the average retiree will receive an extra $49 per month, or $588 per year. If the COLA had been tied to CPI-E, the monthly increase would have been $58, equating to $696 annually.
| Year | CPI-W Inflation | CPI-E Inflation |
| 2024 | 3.20% | 4% |
| 2025 | 2.50% | 3% |
| Total COLA | 5.80% | 7.10% |
Finding Ways to Offset Inflation’s Impact
Although these differences may seem small, they can add up for retirees already struggling with financial insecurity. Fortunately, there are ways for retirees to boost their income.
With interest rates remaining high, options such as certificates of deposit (CDs) and high-yield savings accounts can provide additional returns. Alternatively, with the stock market near record highs, some retirees may choose to sell stocks to generate extra income.
In summary, while the 2025 COLA may provide some relief, it is unlikely to fully alleviate the financial pressures many retirees face.
Given the complexities of inflation and the shortcomings of current COLA calculations, ongoing efforts to address these challenges are critical for helping retirees maintain their standard of living in the years ahead.