Social Security’s 2025 historic cost-of-living adjustment (COLA) is about to produce a trio of disappointments

For most retired Americans, a Social Security check isn’t just another piece of paper. It is a vital source of income without which the vast majority of people aged 62 and over would struggle to live.

For the past 23 years, the national Gallup poll has surveyed retirees to gauge how much they rely on the income they receive from America’s leading retirement program. Consistently, 80% to 90% of retirees rely on their monthly paycheck to cover at least some of their expenses. In Gallup’s 2024 poll, only 11 percent of respondents noted that their Social Security income is unnecessary.

Nothing matters more to the 86 percent of Social Security recipients who are 62 and older than the annual cost of living adjustment (COLA), which is scheduled for October 10.

While Social Security’s 2025 COLA is on track to make history, it also appears to offer a number of disappointments for seniors.

Image source: Getty Images.

What purpose does the Social Security COLA serve and how is it calculated?

In a perfect world, the price of the goods and services we buy would remain static, and we would never have to worry about our salary, wages, or social security benefits failing to keep up with inflation (rising prices). But in the real world, the price we pay for all kinds of goods and services is dynamic. The purpose of Social Security’s COLA is to ensure that benefits do not lose purchasing power over time.

Before 1975, cost-of-living adjustments were assigned without rhyme or reason by special sessions of Congress. After the 1940s, when zero benefit adjustments were made, Congress enacted 11 COLAs from 1950 to 1974.

Beginning in 1975, the Consumer Price Index for Urban Wage and Service Workers (CPI-W) became the inflation measure used by Social Security to calculate annual cost-of-living adjustments. The CPI-W has over half a dozen major expenditure categories and a multitude of subcategories, all with unique percentage weights. It is these weights that allow the CPI-W to be reduced to a single digit at the end of a month, making for quick and easy year-on-year comparisons to determine whether prices are collectively rising or falling.

Although the CPI-W is reported monthly by the US Bureau of Labor Statistics (BLS), only 12-month readings from the third quarter (July through September) are used in the COLA calculation.

If the average value of the CPI-W in the third quarter of the current year has increased compared to the comparable period of the previous year, inflation has occurred, and Social Security recipients are in turn seeing their benefits increase in the following year. The amount of this increase is determined by the year-over-year percentage change in the average third-quarter CPI-W readings, rounded to the nearest tenth of a percent.

A rise in the U.S. inflation rate has led to three above-average COLAs in a row. US Inflation Rate Data by YCharts.

Social Security’s 2025 cost-of-living adjustment is poised to make history

For now, nothing is set in stone when it comes to Social Security’s 2025 cost-of-living adjustment. With July in the books, we still have two months of inflation data to receive from the BLS before the official COLA is locked in.

But as of this writing, which is before the BLS releases its July inflation report, the 2025 COLA looks set to make history.

Over the past 15 years, Social Security COLAs have been largely forgotten, with two-thirds of cost-of-living adjustments coming in at 2 percent or less. This includes three years without a COLA (2010, 2011, and 2016) — there is no COLA when deflation occurs and prices fall year over year — and the lowest COLA on record (0.3% in 2017).

However, the last three years have been a nice break for the beneficiaries. In 2022, 2023 and 2024, COLAs of 5.9%, 8.7% and 3.2% were carried forward. The 8.7% COLA in 2023 was the largest year-over-year percentage increase since 1982, as well as the largest year-over-year nominal increase for the average retired worker since Social Security was created.

According to The Senior Citizens League (TSCL), a nonpartisan advocacy group for seniors, the 2025 COLA is estimated at 2.63 percent, which would round to 2.6 percent. That’s right on par with the two-decade COLA average of 2.6% and would mark the first time in 28 years that four consecutive COLAs have reached at least 2.6%.

Meanwhile, independent Social Security and Medicare policy analyst Mary Johnson, who recently retired from TSCL, expects the 2025 COLA to reach a slightly more robust 2.7 percent. It has been 32 years since beneficiaries received a COLA of at least 2.7% in four consecutive years.

Regardless of whether TSCL or Johnson’s forecast turns out to be the most accurate, both imply a historic “raise” for beneficiaries in the coming year.

Image source: Getty Images.

A trio of disappointments likely await retirees

On a nominal dollar basis, a fourth straight year of average or above average COLAs probably sounds fantastic — especially after so many years of subpar benefit increases. But when the outlook is added as a key “ingredient” to Social Security’s 2025 COLA, disappointment appears to be the bottom line for retirees.

The first (and obvious) problem is that beneficiaries are in for their lowest COLA in four years. Even though it’s been roughly three decades since COLAs were this high for four consecutive years, dropping from an 8.7 percent increase to 3.2 percent year-over-year, then falling to 2, 6% or 2.7% over the next year is a bit of a punch in the proverbial bag. For the average retiree, a COLA of 2.6 percent or 2.7 percent would increase monthly checks by just $50 to $52 next year.

The second disappointment for retirees comes in the form of a persistent loss of purchasing power.

Although the CPI-W has made it considerably easier to transmit the annual COLAs since 1975, it is ultimately an inflationary index that tracks the spending habits of “urban wage earners and service workers.” These are typically working-age Americans who do not currently receive a Social Security benefit and, most importantly, spend their money very differently than older people.

Seniors spend a higher percentage of their monthly budget on shelter and health care than the average working-age American. Through June 2024, the unadjusted 12-month inflation rate for shelter and nursing services was considerably higher than TSCL and Mary Johnson’s 2025 COLA estimates.

TSCL found that Social Security revenues have lost 20% of their purchasing power since 2010. A COLA of 2.6% or 2.7% in 2025 will likely exacerbate this loss of purchasing power.

The third bummer for retirees is that Medicare Part B premiums — Part B is the segment of Medicare that deals with outpatient services — are projected to rise 5.9 percent to $185 a month in 2025, according to the Medicare Trustees Report released in May. While this is only an estimate, there is a strong likelihood that Part B premiums will at least double Social Security’s 2025 COLA.

For a large number of retirees, many of whom are on Medicare and have their monthly benefit automatically deducted from their Social Security check, that means most, or all, of the 2025 COLA could be swallowed up by higher Part B premiums.

Even as Social Security’s 2025 cost-of-living adjustment makes history, retirees are slated for the short end of the stick, once again.