Retirees Need to Embrace this Uncompromising Truth About Their 2025 Cost-of-Living Adjustment
Every year, many retirees eagerly anticipate the announcement of their Social Security cost-of-living adjustment (COLA). This seemingly generous increase typically bumps up their benefits, often leading to a larger check starting January. However, it's crucial for retirees to understand the nuances behind this COLA, as it might not serve the purpose they think it does.
The Misconception of a Raise
While the COLA might seem like a genuine raise due to the increased benefit amount, it's important to recognize that this isn't a traditional raise in the sense of a job promotion or salary hike.
Typically, a raise is given based on an employee's achievements, with no direct tie to inflation. As a result, a raise improves your purchasing power over time, allowing you to afford more with your income.
In contrast, the COLA is designed to merely maintain or preserve your purchasing power from the previous year, not increase it. The formula for calculating the COLA uses data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). This index determines the percentage increase in the cost of a specific basket of goods and services during the third quarter of the current year compared to the same period in the previous year. If this index shows a price increase, retirees receive a COLA equivalent to that increase.
The Hidden Problem: Underestimation of Inflation
The underestimation of inflation by the CPI-W is the primary reason why retirees perceive the COLA as falling short. The CPI-W primarily measures the spending habits of urban wage earners and clerical workers, which might not align with those of seniors. As a result, retirees often face above-average inflation, particularly in healthcare expenses. However, since the CPI-W doesn't fully represent this inflation, the COLA might not be enough to compensate for the increase in expenses.
This misalignment means that the COLA gives retirees the ability to purchase fewer goods and services than before, making this "raise" somewhat misleading. Ultimately, seniors should be aware that their benefits might not keep pace with their actual inflation, which could impact their lifestyle and financial security.
Sources:[1] AARP, "Cost-of-Living Adjustment Still Falls Short of Seniors' True Costs," March 2023.[2] Senior Citizens League, "COLA Watch: COLA Estimate for 2025 and Summary of Years Since Last Full COLA," October 2023.[3] Forbes Advisor, "Why Social Security Benefits Aren't Keeping Up With Inflation," October 2023.[4] U.S. Social Security Administration, "How the Cost-Of-Living Adjustment (COLA) is Figured," March 2023.
Despite the COLA increasing their benefit amount, retirees need to recognize that it's not a traditional raise equivalent to a job promotion or salary hike. Instead, the COLA is intended to preserve purchasing power, not increase it, as it's calculated based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). However, this index might not fully represent the inflation experienced by seniors, especially in healthcare expenses, causing retirees to perceive the COLA as falling short.
