What is a Social Security COLA and how can it affect your retirement plan in 2025?

Whether you’re currently retired and collecting Social Security or still in the planning stages, chances are you’ve heard of the cost of living adjustment, or COLA.

The COLA is essentially an annual “increase” that is designed to help benefits maintain their purchasing power over time. Because Social Security benefits are for life, they should be able to keep up with inflation over the decades.

While the COLA may seem simple and straightforward, the program faces some issues that could affect your retirement in 2025 and beyond. Here’s everything you need to know about how to plan for your retirement with your COLA in mind.

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How is the Social Security COLA determined?

The actual calculations that determine the COLA are quite complex, but essentially, the adjustment is meant to reflect changes in inflation from year to year.

It is based on the Consumer Price Index for Urban Wage and Service Workers (CPI-W), which is published monthly by the US Bureau of Labor Statistics. This index measures average price changes for certain goods and services.

The Social Security Administration uses data from the third quarter of the CPI-W, taking an average of the values ​​for the months of July, August, and September. If the average is higher than the average for the same period of the previous year, the percentage difference will be the next year’s COLA. If it is less, there will be no COLA that year.

Historically, COLAs tend to fall between 1% and 3% per year — although we’ve seen some record adjustments in recent years as inflation has risen. Because COLA is directly tied to cost changes, higher inflation generally leads to higher increases.

Source: Social Security Administration. Table by author.

In 2024, the adjustment was 3.2%. So, for example, if you collect $2,000 per month in Social Security benefits, you would have received an additional $64 per month starting in January of this year.

The Social Security Administration is expected to announce the 2025 COLA later this month, and that adjustment will go into effect next January.

Potential challenges ahead

COLA can be a lifeline for many retirees, especially as costs continue to rise and money is tight for those living on a fixed income. Every dollar counts, and that annual raise can go a long way.

However, despite COLA being designed to keep up with inflation, it struggles to do just that. In fact, Social Security benefits are actively losing purchasing power over time, meaning they won’t go as far as they did even a decade or two ago.

A 2024 report by the nonprofit advocacy group The Senior Citizens League found that since 2010, benefits have lost 20 percent of their purchasing power. In addition, the average recipient would need about $370 more per month just for Social Security to hold the same value as it did in 2010.

The problem seems to be getting worse in recent years as well. In four of the past five years, the inflation rate exceeded the COLA for that year, the report said. The only year the COLA managed to outpace inflation was 2023, which happened to have the highest COLA in four decades.

Some experts have urged the Social Security Administration to adjust how it calculates the COLA, perhaps using the CPI-E (which tracks changes in spending by people age 62 and older) instead of the CPI-W, which measures spending patterns for the age of work. the adults.

Basing COLAs on CPI-E would likely result in higher COLAs because seniors often devote more of their budgets to costs like housing and basic necessities — which have skyrocketed in recent years compared to many other expenses. However, since the Social Security program is already facing cash problems related to its trust funds, it is unlikely to make changes that could exacerbate that problem.

How this could affect your retirement

The loss of Social Security’s purchasing power will most significantly affect those who rely heavily on their benefits in retirement — who make up about 60 percent of current retirees, according to a 2024 Gallup poll.

Perhaps the best thing you can do, if possible, is find ways to reduce your reliance on Social Security. That might involve saving more, if you’re still working, or finding other sources of income. You can also see if there are ways to reduce your expenses, helping to stretch your savings a little further.

This won’t be possible for everyone, and many retirees are already financially stretched. But at the very least, staying aware of the situation can go a long way. By making whatever adjustments you can to reduce your reliance on Social Security, the less you’ll be affected by any challenges the program faces.