Social Security’s 2025 cost-of-living adjustment (COLA) has a chance to make history: 10 things you need to know

In June, more than 51 million retired workers received an average Social Security check of $1,918.28, which works out to just over $23,000 on an annual basis. While Social Security benefits won’t make retirees rich, they have proven vital to helping our nation’s aging workforce meet their expenses.

For the past 23 years, Gallup has surveyed seniors to gauge their reliance on America’s largest retirement program. Between 80% and 90% of retired respondents (88% in 2024) said they rely to some extent on Social Security income to get by.

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Perhaps nothing is more important to retirees than Social Security’s annual cost-of-living adjustment (COLA) disclosure and knowing how much they will receive in the coming year.

Based on estimates, Social Security’s 2025 COLA could make history and it disappoints at the same time. Here are 10 things you need to know about this very important announcement.

1. The Social Security COLA takes into account the effects of inflation

Before diving into a deep discussion, it’s important to know what the Social Security COLA is for.

Simply put, a COLA is the mechanism used by the Social Security Administration (SSA) to account for the effects of inflation (rising prices). Its purpose is to ensure that the purchasing power of Social Security income does not decline over time.

For example, if the collective price of a basket of goods and services regularly purchased by seniors increases, Social Security benefits should, in an ideal world, increase by a proportional percentage to ensure that retirees can still buy the same goods and services.

2. October 10th is the official reveal date

The SSA will officially announce the 2025 COLA at 8:30 am ET on Thursday, October 10, 2024.

The reason the COLA is always revealed in the second week of October (which I’ll touch on momentarily) is that the last piece of the puzzle needed for this calculation is the September inflation report. The US Bureau of Labor Statistics (BLS) usually releases inflation reports for the previous month between the 10th and 15th of a given month.

3. Only third quarter 12-month CPI-W values ​​are used in the COLA calculation

Since 1975, the Consumer Price Index for Urban Wage and Service Workers (CPI-W) has served as the annual inflation link for America’s largest retirement program.

Although the CPI-W is reported monthly by the BLS, only the 12-month readings from the third quarter (July through September) are used in the COLA calculation. If the average CPI-W in the third quarter in the current year is higher than the comparable period in the previous year, inflation has occurred and program beneficiaries are owed a COLA in the following year.

For those curious, the year-over-year percentage difference in third-quarter average CPI-W readings, rounded to the nearest tenth of a percent, equals the next year’s COLA.

A historically high rate of inflation has resulted in three consecutive years of above-average COLAs. US Inflation Rate Data by YCharts.

4. COLA 2025 has big shoes to fill

Social Security COLAs have been largely forgotten over the last 15 years. During this period, 10 COLAs reached 2% or less, including three years (2010, 2011, 2016) when deflation (falling prices) occurred and no cost-of-living adjustment was passed.

However, the last three COLAs have been impressive. For 2022, 2023 and 2024, beneficiaries enjoyed COAs of 5.9%, 8.7% and 3.2%, which are well above the two-decade average of 2.6%. The 8.7 percent increase in 2023 was the largest percentage increase in Social Security checks since 1982.

5. Social Security’s 2025 COLA could do something no one has seen in about 30 years

Starting with the June inflation report, projections suggest Social Security’s 2025 COLA could make history.

The nonpartisan, senior-focused advocacy group The Senior Citizens League (TSCL) expects the 2025 COLA to reach 2.63 percent, which would round down to 2.6 percent. Meanwhile, independent Social Security and Medicare analyst Mary Johnson, who recently retired from TSCL, forecasts a 2.7% COLA for 2025.

If Johnson is correct, it would mark the first time in 32 years that four consecutive COLAs have reached at least 2.7%. But even if TSCL’s forecast turns out to be more accurate, it’s been 28 years since four consecutive COLAs came in at 2.6% or higher. Either way, history would be made.

6. Shelter costs are the metacharacter that will determine if history is made

Although the CPI-W has more than half a dozen major spending categories and countless subcategories, its most heavily weighted component, shelter, is the wildcard for Social Security’s 2025 COLA.

The steepest rate hike cycle in four decades has sent mortgage rates soaring in 2023 and effectively crippled the existing home sales market. Although mortgage rates have fallen from their peak in October 2023, it is not yet clear whether it is too little, too late to have an impact on stubbornly high shelter inflation. If the housing inflation rate over the past 12 months remains above 5%, there is a good chance we are witnessing COLA history.

7. Here’s how much benefits would increase for the average recipient

What Social Security recipients really care about is what these percentages will mean to them in dollar terms. Based on TSCL and Johnson’s estimates following June’s inflation report, the average retiree can expect their monthly payment to rise by about $50 to $52 next year.

By comparison, the average disabled worker and survivor beneficiaries would see monthly benefit increases of about $40 to $42 and about $39 to $41 in 2025.

Image source: Getty Images.

8. Beneficiaries lose their purchasing power from the year 2000

Now for the disappointing part: Social Security income has steadily lost purchasing power since the turn of this century.

Last year, TSCL released a study that compared aggregate COLAs between January 2000 and February 2023 with the collective price changes observed for a basket of goods and services regularly purchased by seniors over the same time frame. While COLAs have increased benefits by 78% since the turn of the century, the price for this basket of goods and services has increased by 141.4%!

A more recent report, published in July 2024, shows that Social Security benefits have lost 20% of their purchasing power since 2010. In other words, a COLA of 2.6% or 2.7% won’t cut it for most retirees.

9. Medicare Part B can eat up a considerable percentage of next year’s COLA

To make matters worse, the Medicare Administrators Report, which was released in May, forecast a 5.9 percent increase in Part B premiums to $185 a month for the coming year. Part B is the segment of Medicare that deals with outpatient services.

Most seniors have their Part B premium automatically deducted from their monthly Social Security check. With Part B premiums expected to increase by more than twice the projected 2025 COLA percentage, there’s a good chance they won’t enjoy the full impact of next year’s cost-of-living adjustment.

10. CPI-W is broken and there is no easy fix

Last but not least, you should know that Social Security’s measurement of inflation is inherently flawed.

As its full name suggests, the CPI-W tracks the spending habits of “Urban Salaried and Service Workers.” These are typically working-age Americans who don’t currently receive a Social Security benefit, which is a problem given that 86 percent of the program’s beneficiaries are age 62 and older.

Seniors and working-age Americans spend their money differently. More specifically, seniors spend a higher percentage of their budget on shelters and health care services than the typical working-age American. As a result, these important costs are not adequately reflected in the CPI-W, leading to a persistent loss of purchasing power.

Although lawmakers from both parties acknowledge this shortcoming in the CPI-W, a fix remains a long way off.