Social Security benefits are already one step away from reaching their smallest cost of living adjustment (COLA) in four years, and the forecast was revised downward in the month of June. Inflation has moderated over the past year, but many retired workers continue to struggle to make ends meet.
Less than 50% of retired Americans believe they have enough money and about 90% are worried that rising prices will devalue their savings, according to the 2024 US Retirement Survey by investment manager Schroders, while most of them rely on Social Security benefits to pay for their living expenses.
“Whether it’s a trip to the gas station, the supermarket, or the pharmacy, prices in the United States have increased markedly in recent years, and that’s particularly challenging for retirees living on fixed income sources,” said Deb Boyden, director of U.S. Defined Contribution at Schroders.
How Does the Social Security COLA Increase Works?
Of course, Social Security benefits have annual COLA cost-of-living adjustments to safeguard their purchasing power as prices rise across the economy, but the Senior Citizens League notes that “Colas are increasingly unlikely to keep pace with inflation over time.”
In fact, although benefits have a COLA of 3.2% in 2024, two-thirds of the retirees surveyed say that their expenses increased by more than 3.2%.
This means that Social Security benefits have lost their purchasing power this year, which explains why so many retired workers are going through financial difficulties. Unfortunately, it is unlikely that the problem will have improvements next year, because Social Security benefits are in the process of having an even lower cost of living adjustment in the year 2025, below are the important details.
What Could Be the Impact of a Higher COLA Adjustment?
Older adults may be optimistic about receiving a larger increase than usual, especially for the fourth successive year. This trend does not represent an increase in their purchasing power while, instead, it reflects the inflationary pressures they are already facing, since the initial reason for the large COLA adjustments in recent years has been persistently high inflation.
All that can be done until the economy stabilizes is to try to close the gap, and even that may not be enough in the short term.
Alex Beene, an instructor of financial literacy at the University of Tennessee at Martin, argued in an interview why this may be the case: “While this increase for one more year may seem like an extra layer of support for beneficiaries, there is a reason why it continues to increase historically: prices for seniors in general are significantly higher. It is great that the COLA increment provides more financial assistance through its payments, but it is not a complete solution to inflation.”
Beene also commented that “older people should still be aware of their expenses to maximize the benefits of their Social Security payments and try to replenish their savings if possible.” This could help them cope with another difficulty like this with minimal damage to their economy.
This sentiment was echoed by Kevin Thompson, financial expert and CEO and founder of 9i Capital Group, who said, “The broader implication of the COLA staying higher means that prices around seniors will remain elevated. If the cost of everything around you remains high or increases slowly, that means that the net effect of COLA is less effective. If prices continue to be high, we may see seniors having to reach into their retirement accounts and deplete their savings at a faster rate.”