'I am having a very rough time': Struggling Americans react to 'tiny' Social Security COLA bump for 2025 — 3 ways to make the most of your retirement income without the government's help

Given that COLA is an acronym for cost-of-living adjustment, and inflation continued to dominate headlines for much of 2024, news of a middling increase may not provide much comfort. A thread on Reddit’s Social Security subgroup spelled out the stakes of such a “tiny” increment. One user plainly wrote, “I am a senior and I am having a very rough time,” to which another one replied, “I feel terrible for anyone on a fixed income. How were middle- and lower-class people supposed to prepare for this?”

There is a way to estimate the COLA, though you’d have to follow the fine points of the economy and be able to decode the SSA’s clear-as-mud explanation. It goes like this: “COLAs have been based on increases in the CPI-W from the third quarter of the prior year to the corresponding quarter of the current year in which the COLA became effective.”

Got that?

Common methodology meets creeping anxiety

Translating that explanation into everyday language and a methodology that beneficiaries can understand isn’t easy. CPI-W stands for “Consumer Price Index for Urban Wage Earners and Clerical Workers,” which may make you wonder why white-collar drones and secretaries determine what you’ll get. (They don’t, but leave it to the government to imply indelible images.) Social Security officials compare the CPI-W from the current year’s third quarter to that of the previous year and voila. The new COLA is announced every October and is applied to the following year’s checks.

The same method of calculating the COLA has been used since 1983, which makes it 41 years old. A historical chart of COLA hikes shows some pretty wide disparities that in general have followed the inflation curve. In 1980, it was an astounding 14.3%, while in 2009 and 2010 there was no fizz as zero adjustments were made.

However, critics who say COLA doesn’t correspond to reality may have a point. The sad fact is that broad inflationary measures don’t begin to touch on the soaring costs that affect them disproportionally. For example, according to a KFF analysis of data from the Bureau of Labor Statistics, the cost of a hospital stay jumped 6.9% in June 2024 from the previous year, compared to 3% for all goods and services. Prices for medical care in this period increased by 3.3% overall. In addition, home health aide costs shot up 10% in to an annual median of $75,500, as shown by Genworth’s Cost of Care Survey 2023, released in March.

Three ways to reduce COLA dependence

There are ways to pursue financial freedom from Social Security benefit hikes. Here are three.

Sign up for Medicare: In the event of a health crisis, Medicare can be your greatest ally. In this government program, Part A covers inpatient hospital care, skilled nursing care, hospice care and some home health care. Part B covers doctor and other health care providers' services and outpatient care, durable medical equipment, home health care and some preventive services. Part A is usually premium-free if you’ve paid Medicare taxes for at least 10 years; you can also buy it at either $278 or $506 a month, depending on how long you or your spouse worked and paid Medicare taxes. Part B carries a monthly premium of $175 or higher, depending on your income, and this amount can change each year.

Pay down high-interest debt: No matter what the COLA does, you can reduce your financial drag by paying off any high-interest debt, such as your credit cards. In 2023, the average credit card debt among baby boomers and the silent generation was $6,642 and $3,412, respectively, according to Experian. Meanwhile, LendingTree pegs the average credit card interest rate in America at 24.43% as of December. Any interest accrued is money thrown away. Imagine what you could do with that much extra cash..

Earn money on your COLA: How does adding profit on top of that 2.5% COLA sound? The average annual return of the S&P 500 since 1957 is above 10%. If this figure holds, investing the yearly equivalent of your $50-a-month COLA into an index fund in January could increase your annual gain from $600 to $660 by the end of the year. However, it’s important to note that past results do not guarantee future returns. It might make sense to take a less risky approach at retirement age. Placing that money in a high-yield savings account or perhaps even a CD would provide modest but more reliable returns.