The 2025 Cost of Living Adjustment (COLA) is almost official, and it could reveal a surprising benefit for many retirees

The Social Security Administration will announce the 2025 cost of living adjustment, or COLA, on October 10, and it could disappoint many retirees.

Over the past three years, seniors have become accustomed to super-sized increases. COLAs for 2022, 2023, and 2024 were 5.9%, 8.7%, and 3.2%, respectively. But retirees could be in line for just a 2.5 percent increase in 2025 as things stand today.

However, there is a surprising benefit to a lower COLA for many retirees, and it could mean that many seniors are better off with a smaller monthly benefit check.

Image source: Getty Images.

How the government calculates the Social Security COLA

Social Security’s annual cost-of-living adjustment is designed to help Social Security benefits keep up with inflation. The Social Security Administration uses a subset of the consumer price index known as the CPI-W, which measures the cost of a basket of goods and services representative of typical expenses for an urban wage earner or office worker.

Specifically, the SSA measures the increase in the CPI-W in the third quarter of the year compared to the previous year. This increase becomes the next year’s COLA. So the 2025 COLA will be official when the SSA receives the September CPI-W reading on October 10th.

Many argue that the CPI-W is not representative of the spending of most seniors. That means the COLA doesn’t keep up with how much retirees spend on goods and services each year. In fact, the Bureau of Labor Statistics has created a new subset of the CPI called the CPI-E, which measures the cost of a basket of goods that tracks the spending patterns of Americans age 62 and older. These are the households that the Social Security COLA directly affects.

Some have argued that moving COLA to CPI-E or another measure more representative of the true costs faced by retirees will help many retirement households maintain their standard of living. The Senior Citizens League says the average Social Security recipient who started benefits in 2010 has seen their purchasing power drop 20 percent since they got their first check.

But the fact that the COLA is based on a measure of inflation, even if it’s probably the wrong one, means that a lower COLA could surprisingly be a good thing for many retirees.

The surprising benefit of a small Social Security COLA

Many retirees do not rely entirely on Social Security to fund their retirement budget. They saved and invested in IRAs, 401(k)s and taxable brokerage accounts.

The average household with a person age 62 or older who saved and invested during their career had $200,000 invested in retirement and brokerage accounts at the end of 2022, according to the latest Survey of Consumer Finances from Federal Reserve. Based on stock market returns since then, these balances have likely grown substantially.

These investments receive no cost of living adjustment. They are subject to the whims of the market. All things being equal, those investment accounts will have more purchasing power when inflation is low. Meanwhile, the Social Security COLA is lower when inflation is low, but is theoretically supposed to maintain its purchasing power.

Retirees with significant retirement savings may be much better off with a lower COLA in 2025. In fact, you’ll have more purchasing power in the future if the COLA remains low.

Even if you’re heavily dependent on Social Security, slow and steady inflation is historically better for the overall purchasing power of those monthly checks than higher inflation. The Senior Citizens League found that since 2010, Social Security’s purchasing power has increased in most years when the COLA has fallen below 3 percent. As the Fed continues to target annual inflation of 2%, a 2.5% increase should result in increased purchasing power next year.

So while many may be disappointed by the SSA’s October 10 announcement, seniors should find it easier to afford things in 2025 when they look at the full picture and the totality of their retirement savings and income.