Social Security Shocks Retirees – COLA’s Painful Change in February and What It Means

2025 COLA hike is very low, rising inflation will cause problems for retired people

COLA (Cost-of-Living Adjustment) is implemented every year to increase the income of retired people so that they can avoid the effects of inflation. But the 2025 COLA is the lowest in the last several years and it is not able to meet the rising inflation. This change is going to affect the financial situation of retired people in February 2025 and the coming months.

How is COLA decided?

Since 1975, COLA is calculated every year on the basis of a special index (Consumer Price Index for Urban Wage Earners and Clerical Workers – CPI-W). This index measures the change in the prices of essential goods and services (such as food, house rent, transportation etc.) which are commonly used by retirees.

Method of calculation:

• To calculate the percentage of COLA, the average of CPI-W in July-September of the current year is compared with the third quarter of the previous year.
• If the CPI-W increases, the Social Security benefits rise in the same proportion.
• For CPI-W in 2025, a rate of 2.5% was determined and applied as a rise by 2.5% on Social Security for the retirees beginning from January 2025.

This is quite much lower compared to what has been recorded about inflation, as the latter is always increasing in rate.

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Effect of rising inflation and COLA

• Inflation rose by end 2024 – 2.2% recorded in September 2024 and shooting up to 2.8% in December.
• COLA was predetermined-the 2.5% COLLA was effective, but by then, the inflation rate stood at 2.8%.
• Costs of goods are increasing, while the Social Security benefit will not increase that much-2025 February will result in an increase in expenditure cost to meet the daily needs of the people, but the income will not be that enhanced.
• The CPI-W rate for the entire year can reach as high as 2.9% – This will mean that even the increase in COLA cannot cover inflation.

The direct effect of this will be that the purchasing power of retirees will gradually decrease.

Wrong estimation of inflation and loss to retirees

COLA increase happens every year to balance inflation, but it is decided on the basis of past data and does not take into account future inflation.

Difference between COLA and inflation in recent years:

• Inflation was 3.8% in 2023, but COLA was given only 3.2%.
• Considering inflation in the last two years, 6.8% COLA was required, but only 5.8% was given.

What was its effect?

If a retiree was getting $1,905 per month in Social Security benefits, he was getting $228 less every year. That is, the COLA increase was less than inflation and retirees were losing money.

• This means that retirees may gradually lose their financial stability.

How can retirees deal with this economic crisis?

If your Social Security amount is falling short of inflation, some alternative measures can be considered:

High-Yield Savings Accounts:

Interest rates are a bit high right now, so keeping money in a savings account can earn additional interest.

Money Market Funds:

These are safe investments and are currently giving good returns.

Dividend Stocks:

Stocks of some reliable companies that pay regular dividends can become a source of additional income.

Part-Time Work:

Many retirees can earn additional income by doing remote work (work from home), freelancing or light physical labor work.

Although these measures cannot completely balance the lack of COLA, they will definitely help in reducing the financial burden.

Important steps for retirees

• Rethink your budget: Re-evaluate your monthly expenses to account for rising inflation.
• Find new investment and savings options: Look for interest-bearing savings accounts or other financial plans instead of traditional savings accounts.
• Find new sources of potential income: Try supplementing income with part-time jobs, investments, and other means.
• Keep an eye on inflation: Understand the difference between each year’s COLA increase and inflation and plan ahead.

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Conclusion

The 2.5% COLA increase in 2025 is far below inflation, which can weaken the financial position of retirees. To deal with this rising inflation, it will be necessary to find sources of additional income, whether it is investments, savings plans or part-time work.