With well over 50 million recipients, Social Security retirement benefits are some of the most relied-on benefits the U.S. offers. The payments provide a financial safety net for retirees, with some depending on the benefits as their sole source of income.
The amount of Social Security retirement benefits a person gets can change from year to year, sometimes in unexpected and unwanted ways. The annual cost-of-living adjustment (COLA) isn't always good news for those getting Social Security.
There hasn't been word yet on the COLA for 2025, but there are projections that may not have retirees beaming with happiness.
Image source: Getty Images.
How Social Security determines the next year's COLA
Social Security determines the exact amount of the annual COLA by looking at data from the Consumer Price Index for Urban Wage Earners and Clerical Workers. The CPI-W is a measure that takes into account the prices of items like housing, food, personal care items, and transportation.
Social Security takes the average CPI-W from the third quarter (July, August, and September), compares it to the previous year's third-quarter average, and then sets the COLA based on the change. For example, if the CPI-W average for one year is 200 and then 210 the following year, the COLA would be set at 5%, as the 10-point change is 5% of the starting 200.
The good news is that if the CPI-W data is lower than the previous year's, benefits are not lowered, though there would be no upward COLA. This is uncommon, though -- it's only happened three times since 1975. Below are the previous five COLAs:
| Year | COLA |
|---|---|
| 2024 | 3.2% |
| 2023 | 8.7% |
| 2022 | 5.9% |
| 2021 | 1.3% |
| 2020 | 1.6% |
Data source: Social Security Administration.
Why Social Security recipients may be disappointed with the COLA in 2025
Although official word from the government doesn't come out until October, The Senior Citizens League (TSCL) -- an advocacy group focusing on issues affecting seniors -- is known for its predictions, which can help retirees get a jump-start on planning for how big their checks will be.
TSCL's latest prediction says the 2025 COLA will be 2.63%. That would be the smallest COLA in the past few years, and 1.14 percentage points lower than the average since the CPI-W became the measure to use in 1975.
Of course, anything helps, but this is likely a disappointment for recipients who got used to the bigger increases in 2022 and 2023.
Is there a better measure to use to determine the COLA?
For nearly 50 years, the CPI-W has been the go-to metric for determining COLAs, but many (including the TSCL) have suggested that there may be a better option. When you consider that, according to TSCL, retirees have lost 20% of their purchasing power since 2010, it's fair to question just how effective using CPI-W data is.
One of the CPI-W's biggest issues is that it doesn't fully offset rising healthcare costs, one of retirees' largest expenses. The table below shows how much medical costs for those with individual (not group) insurance has increased in the past five years, including some estimates, along with COLA numbers.
| Year | Medical Cost Increase | Social Security COLA |
|---|---|---|
| 2025 (estimates) | 7.5% | 2.6% |
| 2024 | 7% | 3.2% |
| 2023 | 6.5% | 8.7% |
| 2022 | 5.5% | 5.9% |
| 2021 | 7% | 1.3% |
| 2020 | 6% | 1.6% |
Data sources: PwC's Health Research Institute and Social Security Administration.
Aside from 2022 (which influenced the 2023 COLA), when the U.S. experienced its highest inflation in 40 years, medical costs have routinely outpaced Social Security COLAs. Even in the years when the two are similar, you have to think about the other expenses that also increased.
One recommendation from the TSCL is to use the Consumer Price Index for the Elderly (CPI-E), which looks at spending patterns for those over age 61 and weights data differently.
There is legislation drafted to address this issue, but there's no timeline on if or when it could pass. In the meantime, Social Security recipients should embrace the CPI-W and prepare for what many would consider a lackluster 2025 COLA.
