A Cost-of-Living Adjustment (COLA) is an increase in payments to account for inflation, often used in Social Security benefits. COLA's purpose is to keep the buying power of benefits steady despite higher prices. Inflation lowers the value of a fixed income, so COLA helps balance this out.

For example, if someone got $10,000 in Social Security benefits in 2022, and there was an 8.7% COLA for 2023, their benefits would go up to $10,870.

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How is COLA calculated?   

Each year, the Social Security Administration decides on a cost-of-living adjustment (COLA) by looking at the average increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from July to September. This index is similar to the general inflation measure the Labor Department publishes monthly, but with some differences.

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What was the cost-of-living adjustment (COLA) for 2024?

Older adults saw a 3.2% increase in their Social Security payments starting this year to help them cope with rising prices. This raised the average monthly benefit for retirees by $59.

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What's Happening with the cola 2025 prediction

Estimates from The Senior Citizens League (TSCL) suggest the Cost of Living Adjustment (COLA) for 2025 could be 2.57%. This is lower compared to the 3.2% COLA in 2024, as noted by Alex Moore, TSCL’s Social Security and Medicare expert at Blacksmith Professional Services. Last month, TSCL predicted a slightly higher COLA of 2.66% for 2025.

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These latest estimates are based on the Bureau of Labor Statistics’ (BLS) consumer price index (CPI) data. According to the BLS, inflation measured by the CPI-W, which affects Social Security adjustments, rose 3.3% over the past year. In May, the index showed a slight decrease of 0.1% before seasonal adjustments.

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The BLS also reported that the broader Consumer Price Index for All Urban Consumers (CPI-U) was unchanged in May after a 0.3% increase in April. Over the last year, this index has risen by 3.3% before seasonal adjustments.

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The final COLA for 2025 may vary from these estimates because it is calculated based on the average inflation rate during the third quarter (July, August, September). This rate is determined by the percentage change in the CPI-W compared to the same period a year earlier.

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2025 COLA Prediction: Inflation Trends and Their Impact on Senior Benefits

The 2025 COLA (Cost of Living Adjustment) prediction indicates a reduced adjustment as inflation has eased. Despite this, analysts suggest the 2025 COLA prediction may still fall short of addressing seniors' financial needs.

• The 2025 COLA adjustment has decreased as inflation has slowed down after an earlier increase this year.
• Mary Johnson, a retired analyst from the Senior Citizens League, believes the adjustment likely underestimates what seniors need to match inflation.
• The consumer price index (CPI) rose by 3.3% in May compared to the previous year, a slight decrease from 3.4% in April.
• The core CPI, excluding food and energy prices, increased by 3.4% over the year, down from 3.6% in April, and below economists' predictions of 3.5%.

Seniors slip behind more

COLA is supposed to help older adults on Social Security keep up with living costs, but it hasn't succeeded. Poverty among Americans aged 65 and older increased to 14.1% in 2022 from 10.7% in 2021, marking the largest rise among any age group, according to the latest information from the U.S. Census Bureau.

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How does COLA fail to provide enough stability for seniors?

The CPI-W, used to calculate COLA (Cost of Living Adjustment), assumes that older adults spend about two-thirds of their income on housing, food, and medical costs, according to Johnson. However, in reality, seniors spend around three-quarters of their income on these expenses, according to expenditure data from the Bureau of Labor Statistics. This difference suggests that the COLA estimate based on CPI-W might be underestimating actual inflation for seniors by more than 10%.

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Costs for items that seniors spend the most on have risen sharply in the past year. For example, hospital services increased by 7.2%, transportation services went up by 10.5%, shelter costs jumped by 5.4%, electricity bills climbed by 5.9%, and food prices rose by 2.1%, according to government reports.

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strategies to manage your finances

• Budget Wisely: Make a detailed budget that includes all sources of income and essential expenses like housing, food, and healthcare. Regularly review and adjust your budget to manage expenses effectively.
• Explore Discounts and Benefits: Take advantage of senior discounts offered by various businesses and ensure you are enrolled in all eligible benefit programs like Medicare and Medicaid to reduce healthcare and living costs.
• Consider Downsizing: Evaluate if moving to a smaller home or a more affordable area could lower housing expenses. Explore options like senior housing communities or shared living arrangements.
• Seek Financial Advice: Consult with a financial advisor specializing in retirement planning to optimize your investments and income streams, considering factors like inflation and economic trends.
• Stay Informed: Stay updated on Cost-of-Living Adjustments (COLA) and economic developments that affect your finances. Understanding these factors can help you make informed decisions to protect your financial stability in retirement.

Conclusion

This increase, known as a Cost-of-Living Adjustment or COLA, helps to keep up with inflation. It ensures that the buying power of the money people get doesn't decrease over time. It's not just Social Security that does this—other programs and even some employers might also raise payments to match the cost of living.

For 2025, predictions about COLA increases will depend on how prices change as measured by the CPI-W. If prices go up, the COLA for Social Security and other benefits will likely go up too, to help people maintain their purchasing power. In summary, COLA adjustments are important because they help people whose incomes stay the same to keep up with rising prices. Predictions for 2025 COLA increases will be based on how much prices change leading up to that year.