In July, America's leading retirement program, Social Security, sent out an average payment of $1,919.40 to more than 51 million retired-worker beneficiaries. Despite this payout being modest, it forms the financial foundation for most aging Americans.
For the last 23 years, national pollster Gallup has surveyed retirees in order to gauge how reliant they are on their monthly Social Security benefit. Over this span, 80% to 90% of retirees have noted they require their Social Security income to cover at least some percentage of their expenses, including 88% in the April 2024 survey.
With retirees dependent on Social Security income to make ends meet, it's no surprise that the cost-of-living adjustment (COLA) reveal is the most-anticipated yearly announcement by the Social Security Administration (SSA). Although history may very well be made when Social Security's 2025 COLA is announced in October, it'll nevertheless mark the second consecutive year where seniors will be missing an important silver lining.
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What, exactly, is Social Security's COLA?
As much as we'd like the prices for the goods and services we buy to remain static, this usually isn't the case. Over time, the price for most products and services increases. Ideally, this would mean Social Security benefits should also increase to ensure that beneficiaries can still purchase the same amount of goods and services as they age.
Social Security's cost-of-living adjustment is the mechanism used by the SSA to measure changes in price for a broad basket of goods and services. If inflation (rising prices) occurs, COLA is designed to increase Social Security benefits on an annual basis to avoid a loss of purchasing power for recipients.
From January 1940, which is when the first retired-worker check was mailed, through 1974, COLAs were completely arbitrary and assigned by special sessions of Congress. Only 11 adjustments were passed along during this entire period, including no COLAs during the 1940s.
Starting in 1975, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) became the program's annual measure of inflation. The CPI-W has eight major spending categories and a multitude of subcategories, all of which have individual percentage weightings. These percentages allow the CPI-W to be chiseled down to a single figure each month, which makes for quick and concise year-over-year comparisons to see if prices are, collectively, rising (inflation) or falling (deflation).
Although the CPI-W is reported monthly by the U.S. Bureau of Labor Statistics (BLS), only trailing-12-month readings from July through September are used in the COLA calculation. The reason the SSA has to wait until the second week of October -- Oct. 10 this year -- to report the upcoming COLA is because that's when the BLS releases the September inflation report.
If the average third-quarter CPI-W reading in the current year has risen from the comparable period in the previous year, inflation has occurred and Social Security benefits are going to climb in the upcoming year. The year-over-year percentage difference in average third-quarter CPI-W readings, rounded to the nearest tenth of a percent, equals the COLA.
An uptick in the prevailing rate of inflation has lifted Social Security's COLA in each of the past three years. US Inflation Rate data by YCharts.
Social Security's 2025 cost-of-living adjustment forecasts have narrowed -- here's what to expect
Over the last 20 years, the average cost-of-living adjustment has been a mediocre 2.6%. Most notably, the previous 15 years featured three periods (2010, 2011, and 2016) where no COLA was passed along due to deflation, as well as the smallest positive COLA in history -- 0.3% in 2017.
The only reason COLAs haven't been outright abysmal since 2005 is because of the three most recent increases. In 2022, 2023, and 2024, the program's COLA came in at 5.9%, 8.7%, and 3.2%, respectively. The 8.7% increase in 2023 was the highest on a percentage basis since 1982, and represented the biggest year-over-year nominal-dollar increase for average benefits in Social Security's history.
Although estimates for Social Security's 2025 COLA have significantly narrowed, they're still pointing to a history-making event -- even with the lowest projected COLA since 2021.
In February, following the release of the January inflation report, nonpartisan senior advocacy group The Senior Citizens League (TSCL) was looking for a 2025 COLA of 1.75%, which would have rounded up to 1.8%. After the BLS release of the July inflation report, TSCL's 2025 cost-of-living adjustment forecast now stands at 2.57%, or 2.6% on a rounded basis.
Meanwhile, independent Social Security and Medicare policy analyst Mary Johnson, who recently retired from TSCL, has seen her 2025 COLA forecast steadily contract from 3.2% to 2.6%.
Both TSCL and Johnson, who have lengthy track records of forecasting COLAs, are in agreement that benefits are expected to rise by 2.6% next year. If this proves accurate, it would mark the first time in 28 years that beneficiaries enjoyed a fourth consecutive COLA of at least 2.6%.
What would a 2.6% cost-of-living adjustment mean in dollar terms? For the average retired-worker beneficiary, their monthly check would climb by about $50.
As for workers with disabilities and those receiving survivor beneficiaries, average monthly benefits would be expected to increase by $40 and $39, respectively.
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Sorry, Social Security's 2025 COLA won't contain a silver lining
On a nominal-dollar basis, four consecutive years with average or above-average COLAs probably sounds great. But the unfortunate truth for retirees is that the buying power of a Social Security dollar has been precipitously declining since this century began.
Last year, an analysis by TSCL compared the aggregate COLAs from January 2000 through February 2023 to the price changes experienced by a basket of goods and services regularly purchased by seniors over the same timeline. Whereas COLAs cumulatively increased benefits by 78%, the aggregate price for the basket of goods and services rose by 141.4%. All told, TSCL estimated a 36% loss of purchasing power.
TSCL published a more recent analysis in July 2024 that estimates the buying power of Social Security income is down 20% since 2010. In other words, Social Security's COLAs often aren't cutting it for beneficiaries.
But this is just part of the story.
In 2023, Medicare recipients enjoyed a roughly 3% year-over-year decline in monthly Part B premiums (from $170.10 per month in 2022 to $164.90 per month in 2023). Part B is the segment of Medicare that handles outpatient services.
The reason for this drop was because a huge spike in demand for a costly Alzheimer's disease drug didn't materialize, as initially forecast. This left the Supplementary Medical Insurance Trust Fund with a hefty reserve, which was used to reduce Part B premiums in 2023. The end result was that Social Security beneficiaries, who were also enrolled in Medicare and typically have their Part B premium automatically deducted from their Social Security check each month, were able to hang onto more of 2023's record-breaking 8.7% COLA.
In 2024, this silver lining went away. Part B premiums rose by 5.9% to $174.70 per month this year, which is nearly double the 3.2% COLA that was passed along by Social Security. Long story short, rapidly rising Part B premiums have somewhat or completely offset the 2024 COLA for an overwhelming majority of recipients.
For a second consecutive year, this silver lining will be missing. The 2024 Medicare Trustees Report estimates that Part B premiums will climb 5.9% to $185 per month in 2025. This would more than double the estimated 2.6% COLA and will likely eat up a majority of next year's cost-of-living adjustment for lifetime low earners.
Not even a history-making 2025 COLA can halt the precipitous loss of buying power Social Security's retired workers are contending with.
