The Cost-of-Living Adjustment (COLA) aims to assist beneficiaries preserve purchasing power despite growing inflation. However, the relatively modest proportion has raised concerns among retirees, many of whom believe the rise will be insufficient to cover rising basic necessities and medical bills.
In 2024, the COLA was set at 3.2%. However, high inflation in the first quarter of the year surpassed the adjustment, leaving many seniors struggling to cover actual expenditures. Beneficiaries are concerned that the increased rise will not be adequate to offset their additional financial obligations, given the smaller COLA for 2025.
Retirees and the Cost-of-Living Adjustment
The COLA computation uses the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). It compares the average CPI-W from the third quarter of this year to the same time last year. For 2025, this methodology resulted in a 2.5% rise.
In 2024, the average monthly retirement pension was about $1,924.35. A 2.5% increase equals an additional $48.11, bringing the average monthly payment to around $1,972.46. For those getting lower payments, the rise will be significantly minimal, perhaps leaving them unable to meet basic needs.
Is the COLA enough for retirees?
One concern with the COLA is that retirees’ costs may not always match the index used to determine the increase. For example, medical costs, which account for a considerable chunk of most seniors’ budgets, increased by 3.8% in the previous year.
This disparity has prompted many to call for a more tailored index, such as the Consumer Price Index for the Elderly (CPI-E), which more accurately reflects older individuals’ buying patterns.
The CPI-W frequently underestimates retirees’ requirements since it prioritises categories of expenses that are less important to elders. As a result, many recipients receive increases that are insufficient to cover their actual cost increases, leaving them in a financial dilemma.
Why some retirees will see less money
Although the COLA officially boosts Social Security payouts, many seniors will get a reduced net gain due to rising Medicare Part B premiums. These premiums are automatically withdrawn from claimants’ Social Security income, lowering the amount they get each month.
On November 8, 2024, the Centres for Medicare and Medicaid Services (CMS) stated that the regular Medicare Part B premium would rise by $10.30 per month in 2025, reaching $185. This increase directly reduces the COLA’s net impact on beneficiaries’ income.
For example, after deducting the new Medicare cost, a beneficiary who receives an additional $48.11 per month from the COLA will only gain $37.81. In some circumstances, this amounts to a 20% drop in the predicted rise.
The impact on higher-income beneficiaries
Retirees with higher salaries will encounter much more challenges. While their Social Security payouts are higher, their Medicare Part B premiums also rise with income.As a result, these individuals may receive a disproportionately lower net benefit from the COLA, further straining their finances.
For many retirees, the 2.5% rise in Social Security income will provide little relief from inflation. At the same time, increased Medicare premiums would further cut net benefits, raising concerns about retirees’ capacity to finance basic necessities such as food, shelter, and medical care.
The continued issues underline the need to reassess the COLA calculation and consider legislative adjustments that better represent seniors’ financial reality. Beneficiaries should wait for notices from the Social Security Administration in December 2024 to acquire precise details on their modified payments and plan accordingly.
While 2025 will provide financial challenges for many retirees, it also emphasises the significance of ongoing efforts to develop a system that better meets their requirements.