Social Security’s 2025 Cost-of-Living Adjustment (COLA) Will Miss Big Reason for Second Year in a Row

In July, America’s main retirement program, Social Security, sent an average payment of $1,919.40 to more than 51 million retired beneficiaries. Despite the fact that this payment is modest, it forms the financial foundation for most older Americans.

For the past 23 years, the national Gallup poll has surveyed retirees to gauge how dependent they are on their monthly Social Security benefit. During this period, 80% to 90% of retirees noted that they need Social Security income to cover at least one percent of their expenses, including 88% in the April 2024 survey.

With retirees depending on Social Security income to make ends meet, it’s no surprise that the cost of living adjustment (COLA) reveal is the Social Security Administration’s (SSA) most anticipated annual announcement. While history may very well be made when Social Security’s 2025 COLA is announced in October, it will still mark the second year in a row that seniors will be without a big reason.

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What exactly is the Social Security COLA?

As much as we would like the prices for the goods and services we buy to remain static, this is usually not the case. Over time, the price of most products and services increases. Ideally, this would mean that Social Security benefits should increase to ensure that beneficiaries can still purchase the same amount of goods and services as they age.

The Social Security cost-of-living adjustment is the mechanism used by the SSA to measure price changes for a broad basket of goods and services. If inflation (price increases) occurs, COLA is designed to increase Social Security benefits annually to avoid loss of purchasing power for recipients.

From January 1940, when the first workers’ pension check was mailed, until 1974, COLAs were completely arbitrary and assigned by special sessions of Congress. Only 11 adjustments were made during this entire period, including no COLAs in the 1940s.

Beginning in 1975, the Consumer Price Index for Urban Wage and Service Workers (CPI-W) became the program’s annual measure of inflation. The CPI-W has eight major expenditure categories and a multitude of subcategories, all with individual percentage weights. These percentages allow the CPI-W to be whittled down to a single figure each month, making for quick and concise year-on-year comparisons to see if prices are collectively rising (inflation) or falling (deflation).

Although the CPI-W is reported monthly by the US Bureau of Labor Statistics (BLS), only the 12-month values ​​from July through September are used in the COLA calculation. The reason the SSA has to wait until the second week of October — October 10 this year — to report the future COLA is because that’s when the BLS issues its September inflation report.

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 benefits will increase in the following year. The year-over-year percentage difference in third-quarter average CPI-W readings, rounded to the nearest tenth of a percent, equals the COLA.

An increase in the prevailing rate of inflation has raised the Social Security COLA in each of the past three years. US Inflation Rate Data by YCharts.

Social Security’s 2025 cost-of-living adjustment projections cut — here’s what to expect

Over the past 20 years, the average cost of living adjustment has been 2.6%. Most importantly, the last 15 years featured three periods (2010, 2011 and 2016) where no COLA was passed due to deflation, as well as the smallest positive COLA on record — 0.3% in 2017.

The only reason the COLA hasn’t been downright abysmal since 2005 is because of the three most recent increases. In 2022, 2023, and 2024, the program’s COLA reached 5.9%, 8.7%, and 3.2%, respectively. The 8.7 percent increase in 2023 was the largest percentage increase since 1982 and represented the largest year-over-year nominal increase in average benefits in Social Security’s history.

Although Social Security’s 2025 COLA estimates have been reduced significantly, they still point to a history-making event — even with the lowest COLA projected since 2021.

In February, following the release of the January inflation report, the nonpartisan senior advocacy group The Senior Citizens League (TSCL) was seeking a 2025 COLA of 1.75%, which would have rounded to 1.8%. Following the BLS release of the July inflation report, TSCL’s cost of living adjustment forecast for 2025 is now at 2.57%, or 2.6% on a rounded basis.

Meanwhile, independent Social Security and Medicare analyst Mary Johnson, who recently retired from TSCL, noted that the 2025 COLA forecast has steadily declined from 3.2 percent to 2.6 percent.

Both TSCL and Johnson, who have a long history of forecasting COLAs, agree that benefits are expected to rise 2.6% next year. If this proves correct, it would mark the first time in 28 years that beneficiaries have enjoyed a fourth consecutive COLA of at least 2.6%.

What would a 2.6% cost of living adjustment mean in dollar terms? For the average retiree, their monthly check would increase by about $50.

For disabled workers and those receiving survivor benefits, average monthly benefits would be expected to increase by $40 and $39, respectively.

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Sorry, Social Security’s 2025 COLA will have no idea

On a nominal dollar basis, four consecutive years of average or above-average COLAs probably sounds great. But the unfortunate truth for retirees is that the purchasing power of a Social Security dollar has declined sharply since the turn of this century.

Last year, an analysis by TSCL compared aggregate COLAs from January 2000 to February 2023 with the price changes experienced by a basket of goods and services regularly purchased by seniors over the same time frame. While COLAs cumulatively increased benefits by 78%, the aggregate price for the basket of goods and services increased by 141.4%. In total, TSCL estimated a 36% loss in purchasing power.

TSCL published a more recent analysis in July 2024 that estimates the purchasing power of Social Security income has fallen 20 percent since 2010. In other words, Social Security COLAs often don’t cut it for recipients.

But this is only part of the story.

In 2023, Medicare beneficiaries enjoyed a roughly 3% year-over-year increase decline in monthly Part B premiums (from $170.10 per month in 2022 to $164.90 per month in 2023). Part B is the segment of Medicare that deals with outpatient services.

The reason for this decline was because a huge increase in demand for an expensive Alzheimer’s drug did not materialize as originally forecast. This left the Supplemental Medical Insurance Trust Fund with a sizable reserve, which was used to reduce Part B premiums in 2023. The end result was that Social Security beneficiaries who were also enrolled in Medicare and, usually have their premium automatically deducted from Part B. Social Security checks each month, were able to cling to more of the COLA, a record 8.7% from 2023.

In 2024, this silver aspect is gone. Part B premiums rose 5.9 percent to $174.70 a month this year, which is nearly double the 3.2 percent COLA that Social Security passed on. In short, rapidly rising Part B premiums have somewhat or completely offset the 2024 COLA for an overwhelming majority of beneficiaries.

For the second consecutive year, this silver lining will be missing. The 2024 Report to Medicare Administrators projects that Part B premiums will rise 5.9% to $185 per month in 2025. This would more than double the estimated COLA of 2.6% and likely eat up most of the cost adjustment next year’s life for a lifetime low. winners.

Not even a history-making 2025 COLA can stop the sudden loss of purchasing power facing retired Social Security workers.