3 things all retirees need to know about Social Security settlements

The annual Social Security Cost of Living Adjustment, or COLA, is one of the most important details of the government program. Annual increases in benefits help ensure that seniors can maintain their standard of living during retirement.

But the details of the annual COLA should not be ignored. Understanding how COLA works can help you make some very important financial decisions over the next few months, the next year, and possibly most of a decade. And given the importance of Social Security to many households’ retirement budgets, it pays to know all the details about the Social Security COLA.

Here are three things all retirees need to know.

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1. How the government calculates COLA

A basic understanding of how the government calculates your annual COLA can help you plan for both the coming year and your entire retirement.

The COLA is based on the average year-over-year increase in inflation during the third quarter. The measure of inflation used by the Social Security Administration is the CPI-W, which measures the cost of a basket of goods and services used by urban wage earners and service workers.

The calculation is simple. The SSA takes the average CPI-W reading in July, August, and September. It then compares that number to the average reading in the same months of the previous year. The increase becomes next year’s COLA.

The choice to use the CPI-W measurement is a bit controversial. Many advocates argue that the SSA should use the CPI-E reading, which measures a basket of goods that reflects the typical expenses of a person age 62 or older. The reading may more accurately reflect true changes in the cost of living for retirees.

The Senior Citizens League says the average retiree’s Social Security check has lost 20 percent of its purchasing power since 2010, despite COLAs that have increased those checks by about 40 percent. That’s because essentials like health care, food, and housing all grew even faster than the CPI-W reading during that period. CPI-E may give more weight to these items because they typically make up a larger portion of seniors’ budgets.

2. When annual COLA is announced

The Social Security Administration cannot calculate the next COLA until it receives all the necessary CPI-W data points from the Bureau of Labor Statistics (BLS). There is a delay of about two weeks from the end of the month until the BLS can release the numbers. This means that September’s CPI-W reading will not appear until mid-October. And then the SSA will announce the COLA.

The SSA will announce the 2025 Social Security COLA on October 10. While the SSA publishes the COLA in October, it won’t go into effect until December. The change is reflected in the payments received in January. So if you check your Social Security account in December, you can see how much you’ll get each month next year.

3. COLA applies whether you collect benefits or not

The cost-of-living adjustment isn’t just for current Social Security recipients. Anyone age 62 or older can get COLA.

The Social Security Administration bases its benefit calculation on certain numbers locked in the year you turn 62. The calculation will determine the value of your primary insurance or PIA. This is the amount you will receive if you claim benefits in the month you reach retirement age.

It’s also worth pointing out that any wages earned at age 60 or later will not receive an inflation adjustment when the SSA calculates your benefit. But retirees will benefit from PIA’s COLA increase beginning in the year they first become eligible.

This can result in a substantial increase in benefits for those who wait to claim benefits until age 70. Not only do they have delayed retirement credits added to their monthly check, but COLAs also accrue during this time. So you don’t have to file for benefits as soon as possible to start getting your annual Social Security COLA.