COLA 2025 from Social Security: Good news for retirees

Many seniors get most or all of their retirement income from Social Security. Because of this, annual cost of living adjustments, or COLAs, are extremely important.

The purpose of the Social Security COLA is to help ensure that benefits keep pace with inflation. And those COLAs are calculated based on inflation data — specifically, from the third quarter of the year.

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Based on what we know so far, it looks like the Social Security COLA in 2025 will be less than the pay raise seniors receive in early 2024. But there is some very positive news buried in this projection.

How to Calculate Social Security COLA

Social Security COLAs are directly tied to increases in the Consumer Price Index for Urban Wage and Service Workers (CPI-W). When there is an increase in the CPI-W in the third quarter of the year compared to the previous year, social security benefits will increase. When there is no increase or decrease, Social Security benefits will remain the same. They cannot decrease from one year to another.

It’s worth noting that some senior advocates believe that the CPI-W is not a great measure of Social Security COLA. To that end, an alternative measure — the CPI-E or Consumer Price Index for the Elderly — has been proposed.

Such an index could more accurately reflect the costs faced by social security beneficiaries, as these could differ substantially from the costs borne by white-collar workers and urban wage earners. And also, let’s not gloss over the “urban” part. Not all retirees live in urban areas, and many avoid them specifically to keep their living costs down.

But back to the CPI-W. Based on baseline inflation data, Social Security’s current 2025 COLA estimate is 2.63%. It is below the 3.2% increase that retirees received at the start of 2024.

However, a COLA of 2.63% is by no means the lowest on record. And that number has the potential to change, as we’re only halfway through the third quarter of the year and we don’t yet know what inflation has in store.

But the main reason there is good news on the Social Security COLA side is that a smaller increase indicates lower inflation. Seniors now pay less for things like groceries, utilities and gas. If this trend continues, seniors could end up benefiting financially, even if the 2025 COLA is not as generous,

Social Security recipients saw their benefits increase by 3.2 percent at the start of the current year. But if inflation is already relaxation, means that the elderly are now enjoying some relief.

We will have to wait and see

The Social Security Administration will not announce the 2025 COLA until October. Until then, seniors will have to sit tight and be patient.

But even if next year’s COLA isn’t as high as 2024’s, that’s not necessarily a bad thing. In fact, it’s quite reasonable to think of this as a good thing because of the positive impact of cooling inflation on the everyday purchases of seniors.