My Retirement: How I Plan for a Low Social Security COLA Increase
If you are a retiree or set to become one in the next year, you probably have a map planned out for your budget, living expenses, and other financial avenues.
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Even if you do not keep up with all the news about Social Security, chances are you have heard the rumblings that the cost of living adjustment (COLA) increase for next year might be lower than you initially expected.
Also here’s why every retiree is not getting the full COLA increase.
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Understanding COLA
For some background on COLA, the Social Security Administration stated that: “Legislation enacted in 1973 provides for cost-of-living adjustments, or COLAs. With COLAs, Social Security and Supplemental Security Income (SSI) benefits keep pace with inflation.”
COLA is determined based on a formula that calculates what the changes are year to year. Within the formula, “COLAs are based on increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). CPI-Ws are calculated on a monthly basis by the Bureau of Labor Statistics.”
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Concerns About the 2025 COLA
“The primary concern regarding the 2025 Social Security Cost-of-Living Adjustment (COLA) centers around the adequacy of the increase in light of rising inflation and living costs,” explained Cameron Burskey, the Senior Partner & Managing Director Retirement Security at Cornerstone Financial Services.
With inflation rates fluctuating significantly in recent years, Burskey stated that “…there is apprehension that the COLA may not sufficiently keep pace with the actual cost increases that beneficiaries face. This discrepancy could erode the purchasing power of millions of retirees, disabled individuals, and other Social Security recipients who rely heavily on these benefits for their daily expenses.”
Additionally, Burskey noted that there are significant “…fears that the methodology used to calculate the COLA, which is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers, may not accurately reflect the spending patterns and needs of the elderly population, particularly in areas like healthcare and housing, where costs have been rising disproportionately.”
So just how are retirees and those set to leave the workforce setting up for the low COLA increase? In a variety of ways to prepare for the worst and hope for the best.
Financial Planning Insights
“I’m lucky that financial planners through the years have always told me not to rely on increases in Social Security,” shared Deborah Lindner, a retiree in Salt Lake City, Utah. “COLAs always lag behind increases in Medicare and health care expenses in general. So in my retirement planning, I’ve never counted on much of an increase.”
“A few years ago, my husband and I switched to a financial planner who actively manages our retirement investments,” Lindner said. “Her goal is to have our investments go up 8-10% annually, and I have been pleased with what I’ve seen on my monthly statements.”
Personal Experiences and Adjustments
A retiree in the St. Louis Metropolitan Area who wished only to be identified by the initials RSM shared that “I had always hoped to work until age 70 so I could be eligible for the maximum Social Security. Because my work situation was so awful with my last full-time employer, I knew I had to get out of that environment, so I started drawing SS at age 66 which is my NSSRA.”
RSM chose to have “….voluntary Federal Income Tax of 10% withheld from my SS as long as I continue to work part-time because 85% of SS income can be taxable. My reference to NET income below is the AFTER tax amount I have for living expenses. I don’t plan on any increased NET income from Social Security. Even what the COLA increase provides, Medicare takes away.”
Balancing Medicare and Social Security
The situation between Medicare and Social Security was top of mind for RSM, along with many other retirees, who often have healthcare costs at the forefront of their minds when it comes to spending.
“Comparing the NET SS COLA monthly gain to the monthly Medicare fixed cost increases, I’m lucky if I break even with my NET income,” RSM said. “2024 was slightly better by a few dollars per month than 2023 because I found a less expensive prescription plan. I always do plan rate comparisons EACH year to find the lowest annualized cost based on my medications.”
RSM selected to have traditional Medicare (Part A, B, D) instead of an Advantage Plan (Part C) because “…I want to move to rural Missouri in a few years. Even though Advantage Plans include Part A, B, D with no additional monthly fixed costs (beyond the $174.70 cost for Part B), they typically have higher out-of-pocket costs if the participant needs more than routine care, like hospitalization or cancer treatment.”
RSM went on to say “I am very grateful to be able to work 20 hours per week at a very good hourly rate for the St. Louis Metro Area. Part-time work doesn’t offer benefits so I’m fortunate that I am Medicare eligible. The part-time income plus the SS enables me to pay my monthly expenses right now without executing my option to draw funds from my annuity.”
“I’m hoping to be able to keep working part-time until at least 2027 when the required minimum distribution from the annuity takes effect,” RSM continued. “Since I work part-time as a teller at a local credit union, my role will be eliminated in the future as fewer people need face-to-face assistance. This might be sooner than 2027 so then I’ll have to reevaluate my annuity option.”
The Future of Social Security
Another significant concern not just for current retirees, but future ones as well is the long-term sustainability of the Social Security program itself, according to Burskey.
“With the Social Security Trust Fund projected to be depleted by the mid-2030s, any substantial increase in COLA could accelerate the depletion timeline, putting further strain on the program’s finances,” noted Burskey.
“This has sparked a debate on whether more immediate reforms are necessary to ensure the program’s solvency while still providing adequate benefits to current and future recipients,” Burskey went on to explain. “Financial professionals are closely watching legislative proposals and fiscal policies that could impact the program, as well as advocating for a balanced approach that addresses both the immediate needs of beneficiaries and the long-term viability of the Social Security system.”
Conclusion
Burskey concluded by shedding light on the fact that this delicate balancing act underscores the complexity of the issue and the need for comprehensive, forward-thinking solutions.
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This article originally appeared on GOBankingRates.com: My Retirement: How I Plan for a Low Social Security COLA Increase