The halfway point of any year is a good time to reflect on how the year has gone so far and what you can do in the second half to better position yourself financially. One aspect of your finances that's never too early to think about is your Social Security check.
Social Security is a key part of millions of retirees' finances, so knowing just how much to expect from it is crucial for effective financial planning. Although Social Security's official cost-of-living adjustment (COLA) data doesn't come out until October, there are educated estimates that can provide insight and help you get a jump-start on your planning.
The Senior Citizens League (TSCL), a senior advocacy group, recently updated its COLA projection, but retirees may want to manage their expectations.
Image source: Getty Images.
How Social Security calculates the annual COLA
Do you remember when you could walk into your local convenience store with a dollar and leave with chips, candy, and a soda? Those were the good old days. Unfortunately, prices of goods and services rarely remain the same throughout the years, with most increasing over time. One trip to a store is all it takes to see inflation in action.
To help retirees maintain their purchasing power, Social Security adjusts monthly benefits annually to account for inflation. The exact amount is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), a monthly measure of inflation that includes items like housing, food, transportation, and common household items.
Social Security calculates the COLA by averaging the CPI-W for the third quarter (July, August, and September) and comparing it to the same period from the previous year. If the CPI-W is lower than the previous year's, no COLA is made, and benefits remain the same. This has only happened three times since 1975.
The average CPI-W for the third quarter of 2023 was 301.236, compared to 291.901 for the third quarter of 2022. This 3.2% increase became the COLA for 2024, which took effect in January 2024. The CPI-W for the third quarter of 2021 was 268.421, and this large gap from 2022 led to the highest COLA since 1982 -- 8.7%.
Expect an increase, but not much, compared to recent years
TSCL's updated COLA estimate shows an increase of around 2.57% for 2025 (I'll round it up to 2.6%). The average monthly benefit for retired workers in May was $1,917, so a 2.6% increase would bring the average benefit to around $1,967, or just over $23,600 per year.
A 2.6% increase would be a noticeable decrease from the past three years and more than 1 percentage less than the average increase since the COLA became annual in 1975. For perspective, here are the last 10 COLAs:
| Year | COLA |
|---|---|
| 2015 | 1.7% |
| 2016 | 0% |
| 2017 | 0.3% |
| 2018 | 2% |
| 2019 | 2.8% |
| 2020 | 1.6% |
| 2021 | 1.3% |
| 2022 | 5.9% |
| 2023 | 8.7% |
| 2024 | 3.2% |
Source: Social Security Administration.
Recent COLAs may have spoiled Social Security recipients, but there's a silver lining to a relatively low COLA: The prices of the relevant goods and services used in the calculation haven't increased as much as in previous years.
There are expenses retirees face that aren't included in the CPI-W (such as some insurance premiums and long-term care), so it's not always a one-to-one expense-to-COLA increase. Still, any increase, regardless of size, should be welcomed. Just be sure to manage your expectations while planning your retirement income.
