Social Security’s 2025 cost-of-living adjustment (COLA) likely to disappoint: Here’s what all retirees need to know before Oct. 10

Nearly 70 million Americans will receive a total of $1.5 trillion in Social Security benefits this year. Program checks are a key source of income for most US retirees. For some, they are a financial burden: one in seven beneficiaries rely solely on them for income.

As such an important part of the financial lives of millions of Americans, benefits must keep pace with inflation. As the cost of living rises, so must benefits, or retirees would have to continually settle for less until those payments become virtually worthless. Would you consider retiring on $22.54 a month? That was the program’s first check — check number 00-000-001 — when it was cut in 1940.

Fortunately, the law behind Social Security now takes inflation into account: Each year, the program tracks inflation during the third quarter and, based on the reading, determines a cost-of-living adjustment (COLA) for the following year. COLA 2025 will be announced on October 10 before it comes into force in January.

COLAs weren’t always a guarantee

Before 1975, in order for benefits to be increased, legislation had to be passed. As you can imagine, this led to problems. There were long stretches of years when Congress did not raise benefits. However, in the early 1970s, in the midst of terribly high inflation — even higher inflation than the country saw in 2022 and 2023 — Congress acted to automate the annual increase process, creating the COLA- the modern one.

Now, each fall, the Social Security Administration (SSA) calculates a new COLA based on July, August, and September inflation numbers. The SSA specifically looks at a number from the Bureau of Labor Statistics called the Consumer Price Index for Urban Wage and Service Workers (CPI-W).

The 2025 COLA may not be short, and it’s not just this year

Here’s the rub: Do you notice anything odd about the CPI-W, at least in the context of retirement? The CPI-W measures changing costs for wage and service workers, but retirees have different priorities, needs and spending habits than people in the workforce. Consider how much a senior citizen spends on health care than a younger worker — and health care costs have been rising far faster than average prices in other categories.

Since the 1980s, there has been an awareness that the CPI-W was a bit of a square in a round hole. Congress directed the BLS to create an index that more accurately gauges inflation for the elderly, leading to the Experimental Price Index for the Elderly (CPI-E). The CPI-E places a greater emphasis on healthcare costs than other categories to better reflect the reality of how retired Americans spend their money. Unfortunately, it’s still imperfect because it’s just a different balancing of the same items that go into the market basket used to calculate the CPI-W. It uses the same retail outlets, locations and items, rather than a completely new set designed from the ground up for seniors.

In more years than not, the CPI-E is higher than the CPI-W by a fraction of a percentage point. For example, in 2024, retirees received a COLA of 3.2%. It would have been 4.0% if based on the CPI-E. This gap may seem insignificant, but remember the power of the combination. Over time, small differences in annual growth rates can really add up. The Senior Citizens League (TSCL), an advocacy group, estimates that Social Security checks have lost more than 30 percent of their purchasing power since 2000. That’s not insignificant.

COLA 2025 will likely be less than retirees hope

SSA will announce the 2025 COLA on October 10. With inflation continuing to decline, the COLA will likely decline by about 2.5%, down from recent years but more in line with the historical norm. This is unlikely to provide much comfort to the millions of retired Americans who are feeling the need to add costs to their fixed budgets. A TSCL survey found that 63% of seniors are worried that their income will not be enough to cover essentials such as food and housing.