Disappointed with the Social Security COLA? There could be more bad news.

The Social Security Administration (SSA) recently announced the upcoming cost of living adjustment (COLA) for 2025, and many retirees are feeling discouraged by it.

Next year's adjustment will be 2.5%, the lowest level since 2021. Once the COLA takes effect in 2025, the average retiree will receive about $50 more per month.

With costs still stubbornly high, shrinking COLAs won't go far. In fact, according to a 2024 survey by The Motley Fool, a whopping 81% of retirees say these benefits provide little to no help with everyday expenses.

While there is some good news about next year's COLA, there is also some not-so-good news. Here's what you need to know:

The COLA continues to struggle with inflation

In theory, smaller raises for retirees should be a good thing. The COLA is directly related to changes in inflation, so smaller adjustments indicate that inflation is slowing. Lower costs will likely help retirees more than larger COLAs, so this should be good news.

However, Social Security has continually struggled to keep up with rising costs. In fact, inflation has exceeded COLA in four of the last five years. The only year in which the COLA was above the inflation rate was 2023, when the COLA reached a record 8.7% – the highest adjustment in around 40 years.

Part of this problem could be due to the way the COLA is calculated. The SSA uses the Consumer Price Index for Urban Wage Earners and Office Workers (CPI-W), which measures changes in costs that primarily affect workers.

Some experts have pushed for the SSA to use a different index to calculate COLA — specifically the CPI-E, which is designed to capture costs that impact adults ages 62 and older. Using the CPI-E instead of the CPI-W could result in larger COLAs that are better tailored to retirees' financial needs.

Social Security's cash problems could cause more problems

There may be many reasons for the SSA's reluctance to pay out higher COLAs, even if the adjustments struggle to do the job they are intended to do. The system is incredibly complicated and even small changes often require bureaucratic effort.

However, Social Security's ongoing cash flow problems may make it even less likely that we will see more effective COLAs in the future.

The Social Security program has been running a deficit for years. Revenue from payroll taxes and other sources was insufficient to fully fund benefit payments, so the SSA withdrew money from its trust funds to fill the gap.

The story continues

According to the SSA Board of Trustees' most recent estimates, the trust funds are expected to be depleted by 2035. If that happens, current income sources will only be enough to cover about 83% of planned benefits, meaning retirees will have to cut their benefits by 17% over the next decade or so.

The more benefits the SSA pays out, the faster the trust funds will be depleted — and the sooner cuts will become a reality unless lawmakers quickly find a solution. While higher COLAs would have an immediate impact on retirees' bank accounts, they could also cause bigger problems down the road.

What this means for your retirement

There may be nothing you can do about the COLA or the future of Social Security. However, you can take steps to either increase your savings or at least maintain realistic expectations about the amount of your benefits.

If you can either continue working or find an additional source of income, this could help boost your savings. This strategy may not be feasible for everyone, but if Social Security isn't going to be as reliable in the future, it's worth doing what you can to reduce your reliance on your benefits.

Reducing your spending can also help your savings last longer. If your savings are stored in a retirement account such as a 401(k) or IRA, that money will continue to grow as long as it sits in your account. Even if you can't increase your savings, leaving more of your emergency fund untouched can help you grow your money over time.

Millions of retirees are already struggling to make ends meet, and the disappointing COLA may not help much. However, by staying informed about the future of Social Security, you can take as many steps as possible to protect your savings.

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Disappointed with the Social Security COLA? There could be more bad news. was originally published by The Motley Fool