Social Security becomes a much more topical topic of discussion as retirement approaches. For numerous retirees, it serves as an essential source of income.
In actuality, the Center for Budget and Policy Priorities estimates that Social Security keeps nearly 22 million individuals out of poverty. Social Security is important, but it might not provide as much financial assistance as people think.
The average monthly benefit in August was approximately $1,920, or roughly $23,000 yearly. Thankfully, Social Security benefits are increased through cost-of-living adjustments (COLAs) to keep pace with inflation. A COLA of roughly 2.5% is anticipated for 2025.
Let’s examine this adjustment’s ramifications and what it implies for retirees.
COLA
A COLA is intended to ensure that Social Security benefits are adjusted in accordance with inflation and that seniors’ spending power does not decrease significantly over time. Though there are some outliers, most years experience a COLA. Here is a review of the previous several years:
| Year | COLA |
| 2,023 | 3.20% |
| 2,022 | 8.70% |
| 2,021 | 5.90% |
| 2,020 | 1.30% |
| 2019 | 1.60% |
| 2018 | 2.80% |
There can be wide variations in the adjustments, with inflation determining whether the rises are little or large. Over the previous 20 years, the COLA has averaged 2.6%.
Advantages
The projected 2.5% increase in 2025 may not seem like much, but it’s still an improvement over nothing. It’s also critical to keep in mind that some other retirement income sources, such as pensions and fixed annuities, have no inflation adjustment.
Assuming you wait until you are 70 years old to begin receiving Social Security payments, your benefits and COLA amounts will climb.
In the event where postponing increases your benefit from $2,000 to $2,500, for example, a 2.5% COLA results in a monthly rise of $62.50 instead of $50. Over time, your COLA impact will increase with your benefit level.
This yearly increase shields retirees from inflation, which has the potential to devalue sources of fixed income. If you were to retire after thirty years and inflation were to average three percent per year, your fixed income’s purchasing power would be practically halved after twenty-five years. Social Security offsets that decline with COLAs.
Negative aspects
COLAs are helpful, but they’re not flawless. The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which represents the inflationary pressures faced by working people rather than pensioners, serves as the basis for them.
Price variations in areas like housing, transportation, and food are monitored by the CPI-W. However, it ignores the fact that pensioners frequently spend more on healthcare, an area where inflation is more severe.
The Consumer Price Index for the Elderly (CPI-E), which gives higher weight to healthcare costs, may be a more relevant metric. But since this index isn’t used in the current COLAs, pensioners are more susceptible to healthcare costs rising faster than their benefit increases.
Retirees should nevertheless recognize the benefits of Social Security COLAs in spite of this disadvantage. There is some inflation protection offered by the system, notwithstanding its flaws.
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The Benefits
Your lifetime benefits may be significantly impacted by the date you begin receiving Social Security benefits. Postponing benefits until you turn 70 boosts your monthly benefit and amplifies the effect of COLAs.
Each annual COLA adjustment will be more significant the greater your benefit at the beginning, building a snowball effect over time.
Therefore, it’s something to think about if you’re getting close to retirement and can afford to put off taking your Social Security benefits. There could be additional lifetime benefits worth thousands of dollars from this method.
It’s a good idea to assess your retirement income plans and look into ways to increase your Social Security payments while we wait for the final announcement of the 2025 COLA, which is anticipated on October 10.
Even though the projected 2.5% adjustment might not seem like much, these yearly increments eventually offer significant financial security in retirement, particularly in situations where other sources of income might not be inflation-adjusted.
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