In 2024, around 68 million Americans will receive Social Security benefits, with retirees forming the majority of this group. For many, Social Security represents a significant part of their monthly income, especially in retirement when income sources are limited.
For people aged 65 and older, this income can make up over half of their monthly finances, highlighting the importance of any adjustments made to these benefits.
This year, retirees will see a boost in their benefits due to a new Cost-of-Living Adjustment (COLA)—a welcome development for many. Here’s how this change can affect retirees and what to expect from the COLA.
Why Social Security COLA Matters for Retirees
Inflation continues to increase living expenses, particularly for retirees who already feel financial strain due to healthcare, housing, and food costs.
The average retiree now spends around $2,984 per month, which is approximately $1,300 more than what most receive from Social Security benefits. With 43% of retirees expressing heightened concerns about their finances compared to pre-retirement, this adjustment has become essential for many.
As Amie Clark, co-founder of The Senior List, noted, financial strain among retirees is substantial. With more than half feeling they live paycheck to paycheck and over a quarter worrying about affording basic needs, even a small adjustment can make a big difference. The COLA aims to mitigate the impact of inflation on this crucial income source, providing a little more breathing room each month.
How Social Security COLA Works
The COLA is designed to match Social Security benefits to the rising costs of essential goods and services. Introduced as part of the 1972 Social Security Amendments, the COLA became an automatic adjustment in 1975, eliminating the need for Congress to approve benefit increases each year.
Kevin Walton, a registered Social Security analyst, explains that COLA changes allow Social Security to maintain its purchasing power amid inflation. The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) measures inflation and is used as the basis for calculating the COLA.
The CPI-W gauges the annual rise in living costs by analyzing price changes in goods and services such as groceries, healthcare, and housing.
How the COLA Calculation Works
Each year, the Social Security Administration (SSA) uses the CPI-W to determine the COLA by comparing the average CPI-W for the third quarter of the current year with that of the previous year.
Here’s an example of how it works for the upcoming 2025 COLA:
- CPI-W for Q3 2024: 308.729
- CPI-W for Q3 2023: 301.236
- Calculation: ((308.729 – 301.236) / 301.236) x 100 ≈ 2.5%
With a 2.5% increase, retirees will see a corresponding bump in their Social Security benefits. If the CPI-W doesn’t show an increase, no COLA is applied for the year.
Impact of COLA on Retirees’ Monthly Budgets
For retirees who rely on Social Security, a COLA can offer modest relief. Here’s an example of how a 2.5% COLA increase could affect monthly payments:
| Monthly Benefit Before COLA | COLA Increase (2.5%) | New Monthly Benefit |
|---|---|---|
| $1,500 | $37.50 | $1,537.50 |
| $2,000 | $50 | $2,050 |
| $2,500 | $62.50 | $2,562.50 |
For those receiving the average benefit of about $1,920, this means an additional $48 per month. While this may not cover the full impact of inflation, it helps retirees keep pace with rising costs.
Is COLA Enough to Address Retiree Financial Concerns?
Although the COLA adjustment is essential, it doesn’t fully address the financial challenges faced by retirees. Rising healthcare costs, housing expenses, and food prices still outpace COLA increases, leaving many struggling to meet their needs. For example:
- Healthcare: Retirees face rising medical costs, often outpacing their COLA adjustments. Medicare premiums alone can significantly cut into Social Security payments.
- Housing: The lack of affordable housing for seniors means that rent and property taxes continue to be substantial expenses.
- Essentials: Grocery prices and utility bills add to the cost of living for retirees, affecting their monthly budgets.
Planning for Future Financial Stability
For retirees relying heavily on Social Security, it’s essential to explore additional ways to manage expenses. While a 2.5% increase helps, it may not fully compensate for rising living costs.
Retirees may consider budgeting adjustments or consulting with financial advisors to explore additional income options.
Stephen Kates, a financial analyst, emphasizes that while Social Security offers a stable income stream, retirees need to develop strategies to keep up with inflation, such as tapping into other retirement funds or delaying benefits until age 70 for higher monthly payouts.
