The 2025 Cost of Living Adjustment (COLA) is almost official. Here’s how much your pension benefits could increase next year

The Bureau of Labor Statistics (BLS) just released the second of three data points that will determine how many retirees will receive Social Security retirement benefits next year.

The Social Security Annual Cost of Living Adjustment, or COLA, is an important feature of the program. Many retirees rely on annual benefit increases to help make ends meet and keep up with the rising costs of everyday living. Last year, Social Security increased benefits by 3.2%.

Seniors may be disappointed to learn that this year’s COLA is on track to come in slightly less than last year. The Social Security Administration takes the year-over-year change in the average inflation reading during the third quarter to determine the adjustment for the following year. In the first two months of the quarter, average inflation rose by just 2.6%. But September’s year-over-year increase could be below that number, pushing the 2025 COLA even lower.

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COLA 2025 social security details

As mentioned, the COLA for each year is determined by measuring the average increase in inflation in Q3. Specifically, the Social Security Administration uses a measure called the CPI-W, which measures the increased cost of living for urban wage and service workers.

The formula is simple: take the average CPI-W reading for the months of July, August, and September and divide that number by the average CPI-W reading for the same months a year earlier. Readings usually occur in the middle of the second week of each month. The BLS just released the data for August, and here’s how things stand today.

Data source: Social Security Administration and Bureau of Labor Statistics.

As noted, the average year-over-year increase in CPI-W in the first two months of the quarter was 2.6%. But a large 0.2% monthly increase in reading last September will likely mean a smaller year-over-year increase in reading for this September. Even with a similar monthly increase to last year, the quarter average will only result in a COLA of 2.5%.

Right now, it’s very likely that retirees will see a COLA of 2.5% next year. The Senior League updated their forecast with the same number. That said, we won’t know for sure until October 10, when the BLS releases September’s CPI-W reading. Any number between 308,662 and 309,610 will result in a COLA of 2.5% due to rounding.

COLA 2025 will leave many pensioners worse off

If the numbers come in as expected, a 2.5% COLA means the average retiree will see a $48 increase in monthly benefits. That’s based on the average retired worker benefit of $1,920 paid last month by the Social Security Administration.

Importantly, Social Security recipients likely won’t see the entire $48 increase hit their monthly paychecks. This is because the Social Security Administration can withhold some of your benefits to pay taxes or Medicare Part B premiums.

Many seniors face the reality that more and more Social Security benefits become subject to income tax each year. That’s because the income thresholds that determine what percentage of benefits are taxable haven’t been adjusted for inflation in over 30 years. As a result, taxes could reduce the growth of your monthly benefit check.

Additionally, the Medicare premium increase could be a rude awakening for many. The Medicare Board has estimated that Part B premiums could increase by $10.30 in 2025 to $185 a month. This will eat up over 20% of your average monthly benefit increase. Medicare premiums for 2025 will not be announced until mid-October.

The rising cost of Medicare points to a significant challenge for retirees. Many see their real cost of living rise faster than their Social Security COLA. Medical costs make up a large portion of seniors’ budgets and have risen faster than average inflation. Housing is another big budget category for many, and the housing component of inflation is also rising faster than the overall average. As such, many retirees are forced to tighten their budgets as their Social Security checks fail to keep up with their basic needs.

The good news for seniors is that the economy is showing signs of returning to slow and steady inflation. Historically, low and stable inflation has led to an increase in the purchasing power of Social Security checks. Unfortunately, it looks like retirees will have to wait until at least 2026 to get relief.