For most retired Americans, Social Security provides more than just a monthly check. The income they receive forges a financial foundation during their golden years.
Over the last 23 years, national pollster Gallup has surveyed retirees to gauge their reliance on America's leading social program. Consistently, between 80% and 90% of respondents noted they need their Social Security check to cover at least some portion of their expenses, including 88% of those surveyed in April 2024.
With so many aging Americans counting on Social Security to shore up their finances, it should come as little surprise that the annual cost-of-living adjustment (COLA) is the most-anticipated reveal of the year. This unveiling is now less than two weeks away.
While there's a glimmer of hope for beneficiaries, Social Security's 2025 COLA looks to be shaping up as a double-edged sword for retirees.
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What is Social Security's COLA and how is it determined?
Social Security's cost-of-living adjustment that you're always hearing about is the "raise" beneficiaries receive most years to account for rising prices -- what's better known as inflation. You'll note that I put "raise" in quotation marks to represent that increases to Social Security benefits are meant to match inflation and not outpace it, which a true raise from an employer may be able to do.
Hypothetically, if the price for a broad basket of goods and services regularly purchased by retirees climbs in price by 3.5% from one year to the next, Social Security benefits should rise by the same percentage to ensure that the same quantity of goods and services can continue to be bought. COLA is effectively the mechanism the Social Security Administration uses to avoid beneficiaries losing buying power.
In the 35 years following the initial mailed retired-worker check (January 1940 through December 1974), there was no rhyme or reason to these adjustments. There was no change to benefits during the entirety of the 1940s, and only 11 COLAs were passed by special sessions of Congress over the other 25 years.
Beginning in 1975, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) became the program's measure of inflation that was responsible for determining COLAs on an annual basis. Every component to the CPI-W has individual percentage weightings that allow the index to be chiseled down to a single figure each month, which makes for incredibly easy year-over-year comparisons to determine if prices are, collectively, increasing (inflation) or declining (deflation).
Although the U.S. Bureau of Labor Statistics reports the CPI-W monthly, only the trailing-12-month readings ending in July, August, and September (i.e., the third quarter), are factored into the COLA calculation. If the average third-quarter CPI-W reading in the current year is higher than the comparable period last year, prices have risen and beneficiaries are due a "raise" in the upcoming year.
The year-over-year percentage difference in these average third-quarter CPI-W readings, rounded to the nearest tenth of a percent, determines the amount of Social Security's COLA for the following year.
A sizable uptick in the prevailing rate of inflation led to outsize COLAs in 2022, 2023, and 2024. US Inflation Rate data by YCharts.
Social Security's 2025 cost-of-living adjustment offers a modest silver lining
For much of the last 15 years, Social Security COLAs have been minuscule. Two-thirds of COLAs have come in at 2% or below, including three years where deflation occurred and no COLA was passed along (2010, 2011, and 2016).
However, with the nation's central bank and federal government flooding the U.S. economy with capital during the COVID-19 pandemic, we witnessed a huge uptick in the prevailing inflation rate and, subsequently, Social Security cost-of-living adjustments over the last three years: 5.9% in 2022, 8.7% in 2023, and 3.2% in 2024.
Despite the prevailing U.S. inflation rate cooling this year, beneficiaries are on track to receive an above-average COLA, when compared to the last 15 years.
Nonpartisan senior advocacy group The Senior Citizens League (TSCL) began the year forecasting a paltry 1.4% COLA for 2025. But following the August inflation report, its policy analysts have settled on an estimate of a 2.5% COLA for the upcoming year.
Comparatively, independent Social Security and Medicare policy analyst Mary Johnson, who recently retired from TSCL, started her 2025 COLA estimate at 3.2% and has whittled her forecast down to, you guessed it, 2.5%!
With the prevailing rate of inflation hitting its lowest level since February 2021, there's hope that some of the pricing pressures plaguing retirees will begin easing. At the same time, receiving an above-average COLA, respective to the last 15 years, is a silver lining.
For the average retired-worker beneficiary, a 2.5% cost-of-living adjustment translates into a monthly increase of about $48. Meanwhile, workers with disabilities and survivor beneficiaries can expect respective increases of around $39 per month and $38 per month.
Image source: Getty Images.
Social Security's 2025 COLA is yet another double-edged sword for retirees
Superficially, a fourth consecutive year of meaningful nominal increases to monthly benefit checks looks great. But if retirees dig a bit deeper, they're going to find that they're getting the short end of the stick in a variety of ways.
For instance, even though the prevailing inflation rate is at a more than three-year low, the costs that matter most to retired Americans haven't shown signs of easing. Compared to the typical working American, seniors spend a disproportionately higher percentage of their budget on shelter and medical care expenses.
On a trailing-12-month basis, the Consumer Price Index for All Urban Consumers (CPI-U), a similar inflationary measure to the CPI-W, shows shelter and medical care services inflation at 5.2% and 3.2%, respectively. As long as both of these key expenses for retirees are outpacing the forecast COLA for 2025, retirees can almost certainly expect a loss of buying power.
Unfortunately, a loss of purchasing power has been something of the norm for a while. TSCL recently released a report estimating that seniors have seen the buying power of a Social Security dollar decline by 20% since the start of 2010. Next year's COLA is unlikely to change this dynamic.
Additionally, the May-released Medicare Trustees Report estimated that the Part B premium was likely to increase by 5.9% to $185 per month in 2025. Part B is the section of Medicare responsible for outpatient services, and this would mark the second straight year of a 5.9% increase.
Most Social Security beneficiaries have their Part B payment automatically deducted from their monthly check. With the Part B premium increase expected to more than double the forecast 2.5% COLA, a majority of beneficiaries can expect next year's "raise" to be partially or fully negated.
While there are possible silver linings, Social Security's 2025 COLA is shaping up as a double-edged sword for retirees.
