2025 COLA Shortfall: Why Social Security Retirees Are Losing Spending Power

Social Security benefits received a 2.5% cost-of-living adjustment (COLA) in 2025, but for many retirees, this is not enough to keep up with rising prices. Their monthly checks don't go as far as they used to, making it harder to cover everyday expenses like groceries, housing and health care.

How Social Security Adjusts for Inflation

Every year, Social Security adjusts benefits to account for inflation using a system based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). This index measures changes in the cost of food, gas and rent.

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To calculate the COLA, officials compare the average CPI-W from the third quarter (July through September) of one year to the same period the year before. If there's an increase, benefits increase by that percentage the following year.

For 2025, the CPI-W showed a 2.5% increase in 2024, so benefits increased by 2.5%. However, inflation picked up speed toward the end of 2024, which means prices rose faster than the adjustment could keep up with.

Why Retirees Are Losing Spending Power

In late 2024, inflation was on the rise, with the CPI-W increasing to 2.8% by December. The adjustment didn't reflect this jump because Social Security calculates the COLA based on earlier data.

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Here's an example: The average retired worker received $1,905 monthly in December 2023, according to the Motley Fool. If benefits had fully matched inflation over the last two years, that payment would now be $2,034. Instead, it's $2,015 – an annual difference of $228.

This might not sound like much, but every dollar counts for retirees on fixed incomes. When inflation outpaces COLA, retirees lose buying power, making it harder to afford basic needs.

What Retirees Can Do

If Social Security benefits aren't stretching as far as they used to, there are ways to bring in extra income or make your money work harder:

• Consider high-yield savings accounts or money market funds. Thanks to higher interest rates across the economy, these accounts currently offer competitive interest rates. For example, the Vanguard Federal Money Market Fund returned 5.1% last year, and The Motley Fool says it could do something similar in 2025.
• Talk to a financial advisor. They can help you find other ways to stretch your retirement income or make smart investment choices.
• Look for ways to cut back on nonessential expenses. Even small savings can add up over time.

See Also: The average 401(k) balance soars to a record-breaking high – Here's how to know if your nest egg is keeping pace.

Looking to the Future

The 2025 COLA shortfall is a good example of why Social Security doesn't always keep up with the cost of living. Because the system looks at past inflation, it can't respond quickly when prices rise unexpectedly.

Social Security is a major part of the income for many retirees, so these shortfalls hit hard. Staying informed about how the program works and planning ahead can help retirees maximize their benefits.

While Social Security will always adjust benefits each year, it's important to have a backup plan for times when inflation outpaces these adjustments.

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