Social Security’s 2025 cost-of-living adjustment (COLA) looks like bad news and worse news for retirees

Each year, Social Security benefits receive a cost-of-living adjustment (COLA) to help retired workers and other beneficiaries keep up with rising prices. The Social Security Administration will announce the official 2025 COLA on Thursday, October 10, shortly after the Labor Department releases September inflation data.

Unfortunately, all evidence suggests that the 2025 COLA will be a combination of bad news and worse news for Social Security recipients. Read on to learn more.

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The bad news: Social Security benefits are on track to get their lowest COLA since 2021

Social Security’s annual cost of living adjustments (COLAs) are based on a subset of the consumer price index known as the CPI-W. Specifically, the CPI-W from the third quarter of the current year (July through September) is divided by the CPI-W from the third quarter of the previous year, and the percentage increase becomes the next year’s COLA.

Because of this, the Social Security Administration cannot calculate the official 2025 COLA until the Labor Department releases September inflation data. But the Senior Citizens League (TSCL), a nonprofit advocacy group, estimates that benefits will increase by 2.6 percent next year. This is bad news for Social Security recipients, especially those struggling to make ends meet.

Social Security benefits received higher COLAs in each of the past three years: 5.9% in 2022, 8.7% in 2023, and 3.2% in 2024. That means the 2.6% COLA projected in 2025 would be the smallest increase for beneficiaries since 2021. I doubt many retired workers will see this as a positive development. But there is actually a bigger problem.

Worse news: Social Security benefits on track to lose purchasing power in 2025

TSCL estimates that Social Security benefits have lost 20 percent of their purchasing power since 2010 because COLAs have failed to keep pace with inflation. The root cause of this problem is the CPI-W, and the situation is likely to deteriorate further in 2025.

To elaborate, the CPI-W takes into account inflation in eight major product groups, which are weighted based on workers’ spending patterns. But workers are typically young and tend to spend money differently than retired workers on Social Security. For example, retirees generally spend more on housing and medicine and less on transportation and education.

In other words, from the perspective of retirees, the CPI-W places too little emphasis on housing and medicine and too much emphasis on transportation and education. This is particularly problematic because housing and drug costs have risen faster than in the CPI-W year to date, while transportation and education costs have risen more slowly.

Specifically, the CPI-W increased by 3.1% in the first seven months of 2024. Meanwhile, housing costs and drug prices increased by 4.5% and 3.2%, respectively. But transportation costs rose 2.8 percent and education spending actually fell 0.2 percent. In other words, inflation in underrepresented spending groups is rising faster than average, while inflation in overrepresented spending groups is rising more slowly than average.

If the lowest COLA in 2021 is bad news, the result of the situation I just described is even worse news. It means that the 2025 COLA will likely underestimate the true impact of price increases on retired workers, so the increase in benefits will be too small. In other words, Social Security benefits are on track to lose more purchasing power in 2025.