The Social Security COLA Forecast for 2025 Was Just Updated. Here’s the Good News and Bad News for Retirees

The Social Security COLA Forecast for 2025 Was Just Updated. Here’s the Good News and Bad News for Retirees

In 2022, the United States was hit by the fiercest inflation it has seen in four decades, amid persistent macroeconomic disruptions and supply chain problems that followed the COVID-19 pandemic . Thus, in January 2023, Social Security beneficiaries got an 8.7% cost of living adjustment (COLA) – the largest increase since the early 1980s. But many retirees are still struggling.

According to the 2024 Retirement Confidence Survey conducted by the Employee Benefit Research Institute, more than a quarter of retirees lack confidence in their ability to live comfortably in retirement. Inflation was the most common reason for this lack of confidence. Additionally, more than half of the retirees who responded said they feared they would have to significantly reduce their spending to compensate for rising prices.

So it’s natural that many retirees are eager to know how much their benefits will increase next year. We still have several months to go before we officially know what the 2025 COLA will be, but the Senior Citizens League recently updated its forecast.

The Social Security COLA Forecast for 2025 Was Just Updated. Here’s the Good News and Bad News for Retirees

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Social Security COLAs are determined by inflation

Social Security’s annual COLAs are based on the inflation rate for the third quarter of each year, July through September. The specific measure used is a subset of the Consumer Price Index (CPI) known as the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which tracks a price basket designed to reflect what these workers spend their money on. .

Whatever the year-over-year increase in CPI-W was during the quarter (if that) is what the next year’s COLA will be. For example, the 3.2% COLA applied to Social Security benefits in 2024 reflects a 3.2% increase in the third quarter CPI-W in 2023.

The Social Security Administration cannot calculate the 2025 COLA until the Department of Labor releases CPI-W data from September through October. This means that any estimates made before actual data arrives are subject to change, although forecasts will become increasingly accurate as October approaches.

The good news: Social Security benefits could get a higher COLA than expected

CPI-W inflation accelerated sequentially in February and March, then slowed in April. Because of this back and forth, the Senior Citizens League has already revised its forecast for the 2025 COLA several times. And with each subsequent revision, its forecast has increased.

In January, the nonpartisan, nonprofit advocacy group projected that Social Security benefits would increase by 1.4% next year. But it raised its COLA forecast for 2025 to 1.8% in February, 2.4% in March, 2.6% in April and 2.7% in May, as falling inflation continued. stopped at around 3% to 3.5%.

If the group’s latest estimate is accurate, the average retiree’s monthly benefit will increase from $1,915 in April 2024 to $1,967 in January 2025. In other words, a 2.7% COLA means the average retiree will receive $51 more per month (or $612 for the entire year) in Social Security benefits in 2025.

The bad news: Social Security benefits could lose some purchasing power in 2025

As mentioned, the Social Security COLA for a given year depends on how the third quarter CPI-W changed over the previous year. COLAs are intended to compensate for the loss of purchasing power caused by inflation in the previous year.

With this in mind, the average CPI-W during the first four months of 2024 was 3.2% higher than the average CPI-W during the first four months of 2023. In this context, a 2025 COLA of 2 .7% is potentially bad news for beneficiaries because the CPI-W has increased faster than that.

If this trend persists – that is, if the full-year CPI-W rises more than the third-quarter CPI-W in 2024 – Social Security benefits will lose some power purchase in 2025. Thus, retirees and other beneficiaries could have the impression of having less money next year despite the increase in the cost of living.

As a small consolation, interest rates are at their highest levels in two decades, so moving money into a high-yield savings account would be a good way to earn some extra cash right now.

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The Social Security COLA forecast for 2025 has just been updated. Here’s the good and bad news for retirees was originally published by The Motley Fool

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