Social Security Retirees in 2025 Are Looking at Their Smallest Raise in 4 Years

The U.S. Bureau of Labor Statistics recently released inflation data for August. The numbers were roughly in line with expectations and continue to suggest that retirees are looking at a smaller raise to their Social Security benefits in 2025 compared to recent years. At this rate, retirees may soon see the smallest raise to their benefits since 2021. This comes after surging inflation resulted in some of the biggest increases to Social Security benefits in decades. Let's take a look at where things stand.

How the COLA works

Each year, there is a cost-of-living-adjustment (COLA) to Social Security benefits. The goal is to make sure the purchasing power of benefits keeps pace with inflation, although some would argue the current methodology for calculating the COLA has fallen short of this goal.

The Social Security Administration (SSA) calculates the COLA by looking at data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which tracks the price changes on a market basket of goods and services. Specifically, the SSA looks at the CPI-W during the third quarter of the year, which includes the months of July, August, and September, and compares it to the readings from those months a year prior. For example, 2024's 3.2% COLA was calculated using the average quarterly CPI-W figures below.

Data source: Social Security Administration.

The Federal Reserve has spent the last two and a half years hiking interest rates to rein in some of the highest inflation experienced in decades. It has fallen from a peak of 9.1% in June 2022 to 2.5% last month (based on the Consumer Price Index for All Urban Consumers).

Here is where things stand for the 2025 COLA calculation -- the September CPI-W number, the last piece of the puzzle, is due next month.

Data source: Social Security Administration

Based on the CPI-W numbers from July and August, next year's COLA would be 2.6%, and the final figure is likely to fall closer to that number than last year's 3.2%.

The smallest COLA adjustment in four years

A mid-2% COLA may come as a surprise for many Social Security recipients after getting payout increases of 5.9% in 2022, 8.7% in 2023, and 3.2% last year. But they have to remember 2022 was the largest increase in 12 years, while 2023 saw the largest COLA in more than four decades.

According to the Senior Citizens League, retirees have seen their benefits lose purchasing power over the years due to inflation and a flawed COLA calculation. While a lower COLA may seem disappointing at first, remember the reduced inflation behind that number also means retirees' cost of living is increasing more slowly.