Retirees in these 10 states will receive the smallest pay raises next year

Americans have ranked inflation as their biggest financial concern over the past three years, according to Gallup, so Social Security recipients are eager to hear details about the cost-of-living adjustment (COLA) that will be applied to their benefits in 2025.

More specific information will be available once the Labor Department releases September inflation data at 8:30 a.m. ET on Thursday, October 10. Shortly thereafter, the Social Security Administration will issue a press release with details on the official 2025 COLA.

The Senior Citizens League projects benefits will increase by 2.5% next year, while the Congressional Budget Office expects benefits to increase by 3.1%. Both projections imply the lowest COLA (in percentage points) for welfare recipients since 2021. However, the median COLA (in dollars) will vary from state to state.

Read on to see the 10 states where retirees will receive the lowest COLAs in 2025.

Retirees in these 10 states will receive the lowest COLAs in 2025

The Social Security Administration regularly releases anonymized benefit data to promote public understanding and bring transparency to a taxpayer-funded government program. The table below contains information from the 2024 edition of the Annual statistical supplement.

Below are the 10 states (or counties) with the lowest median Social Security benefits for retirees as of December 2023. Monthly payment amounts have been rounded to the nearest dollar.

In 2025, retirees in the 10 states listed above will receive the smallest cost-of-living adjustments (COLAs). That's because they receive the lowest median Social Security benefits, and COLAs are equal to the base benefit multiplied by the percentage increase for inflation.

Here's an example: The median pension for retirees in Mississippi is $1,673 per month, the lowest pension in the U.S. So a 2.5% COLA would increase the monthly payout by about $41.80. In New Jersey, the median pension for retirees is $2,100, the highest pension in the U.S. So a 2.5% COLA would increase the monthly payout by $52.50.

Why retirees in certain states receive lower Social Security benefits

Social Security benefits are based on lifetime earnings and eligibility age. A formula is applied to inflation-adjusted earnings from the 35 highest-paying years of a worker's career to determine their primary insurance amount (PIA). The PIA is the benefit a worker receives if they claim Social Security benefits at full retirement age. For anyone born in 1960 or later, the retirement age is 67.

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The PIA is adjusted according to eligibility age. Workers who start collecting Social Security before reaching full retirement age will receive a lower benefit, meaning they will receive less than 100% of their PIA. And workers who start collecting Social Security after reaching full retirement age will receive a higher benefit, meaning they will receive more than 100% of their PIA.

So here's the question: “Why do retirees in certain states receive lower Social Security benefits?” The answer is a combination of chance and lower average income. Geography plays a role in the equation, but only because average income varies across states. Beyond that, where a retiree lives has no direct impact on their Social Security benefits.

More specifically, five of the 10 states with the lowest median welfare benefits – Mississippi, Louisiana, New Mexico, Arkansas and Kentucky – are also among the 10 states with the lowest median incomes, according to the U.S. Census Bureau. In addition, median incomes in two other states – Maine and Montana – are below the national average.

The last three states or districts – California, Washington DC, and Alaska – are oddballs. They have a median income above the national average, which means that median benefits should also be above the national average. One explanation for this discrepancy is the exceptionally high cost of living in these places.

Specifically, California, Washington DC, and Alaska have the second, third, and sixth highest costs of living in the United States, according to the Missouri Economic Research and Information Center. Workers in these states may be more likely to move in retirement to save money. However, the costs associated with moving may be prohibitive for low-income earners. In this scenario, high-income earners would likely be more likely to move when they retire.

Furthermore, any other plausible explanation amounts to coincidence.

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Social Security COLA for 2025: Retirees in these 10 states will get the smallest raises next year was originally published by The Motley Fool.