Say goodbye to your historic Social Security cost-of-living adjustment (COLA) in 2025

For the majority of Americans, Social Security benefits are absolutely necessary in retirement.

For the past 23 years, national polling firm Gallup has surveyed retirees each year to determine how dependent they are on their Social Security benefits. Consistently, between 80% and 90% of respondents said it was a major or minor source of income, including 88% of respondents in 2024. In other words, most retirees rely on their Social Security benefits to cover at least some of their expenses.

Considering how many retirees count on the United States' premier retirement program to shore up their financial base, no event is more eagerly awaited than the annual announcement of Social Security's cost-of-living adjustment (COLA).

Although this long-awaited announcement is now less than three weeks away (you'll want to mark October 10 on your calendar), hopeful retirees in 2025 will have to say goodbye to what could be a historically significant COLA.

What is the Social Security COLA and why is it so important?

In an ideal world, the price we pay for goods and services would never change. In the real world, however, the price of almost everything we buy fluctuates over time—and often increases. The cost-of-living adjustment is the Social Security Administration's (SSA) tool for ensuring that retirees don't lose purchasing power over time.

A generalized example: If the prices of a broad basket of goods and services that retirees regularly buy increase by 4% from one year to the next, ideally pension checks should also increase by 4% to ensure that recipients can continue to buy the same amount of goods and services.

In the 35 or so years after the first pension check was mailed to retirees, there was no system in place for the SSA to pass on COLAs. Instead, special sessions of Congress were arbitrarily called to distribute them. A total of 11 adjustments were made from January 1940 to December 1974, with no COLAs passed on during the entire 1940s.

In 1975, a modernization occurred when the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) became the annual inflation measure responsible for calculating the Social Security COLA. The CPI-W has eight major spending categories and a variety of subcategories, each with its own weighting. These specific percentage weights allow the CPI-W to be expressed as a single number, allowing for foolproof year-to-year comparisons to determine whether prices are rising overall (inflation) or falling (deflation).

Although the U.S. Bureau of Labor Statistics (BLS) reports the CPI-W monthly—each report consists of price data from the last 12 months (TTM)—only the TTM values ​​from the third quarter (July to September) are used for the Social Security COLA calculation.

If the average CPI-W reading is higher in the third quarter of the current year than in the corresponding period of the previous year, inflation has occurred and benefit recipients can expect a larger benefit check in the coming year.

The amount of the increase in Social Security checks is also easy to determine. The percentage difference in the average CPI-W values ​​for the third quarter compared to the previous year, rounded to the nearest tenth of a percent, gives the COLA for the next year.

A sharp rise in the prevailing inflation rate has led to a rapid increase in COLAs over the past three years. US inflation rate data from YCharts.

Say goodbye to your historic cost of living adjustment in 2025

Cost of living adjustments have been rather meager since 2010. We have seen three years of deflation and no COLA passed through (2010, 2011, and 2016), and the lowest positive COLA ever (0.3% in 2017).

But in 2022, the tide began to turn. A historic surge in the U.S. M2 money supply during the height of the pandemic led to the highest inflation rate in four decades. Because the COLA reflects the price pressures facing beneficiaries, Social Security checks skyrocketed.

In 2022, 2023, and 2024, beneficiaries benefited from cost-of-living adjustments of 5.9%, 8.7%, and 3.2%, respectively. In particular, the 8.7% COLA in 2023 was a 41-year high and the largest nominal dollar increase in the program's storied history.

In recent months, hopes have been high that the 2025 COLA would make history. It has been 32 years since four consecutive COLAs reached at least 2.7%, and 28 years since beneficiaries received a cost-of-living adjustment of at least 2.6% for four years in a row.

Following the July inflation report, nonpartisan seniors advocacy group The Senior Citizens League (TSCL) projected a COLA of 2.57% (which would be rounded up to 2.6%) for 2025. Independent Social Security and Medicare policy analyst Mary Johnson, who recently retired from TSCL, also projected a COLA of 2.6% for next year.

However, the BLS's August inflation report lets retirees say goodbye to their potentially historically significant COLA. As the prevailing inflation rate continues to cool, TSCL and Mary Johnson have lowered their respective COLA projections to 2.5% in 2025. This would be the smallest cost-of-living adjustment in four years and is just below the average COLA of the past two decades of 2.6%.

What would a 2.5% cost-of-living adjustment actually mean for benefit recipients' wallets? For the roughly 51.3 million benefit recipients, the average monthly check would increase by $48.01.

As for the nearly 7.3 million workers with disabilities and the approximately 5.8 million survivor beneficiaries, a 2.5% COLA would increase the average monthly checks for these two groups by $38.50 and $37.73, respectively, in 2025.

Image source: Getty Images.

Pensioners could also face the dreaded double blow to purchasing power next year

Not only will retirees have to say goodbye to a potentially game-changing COLA, but they will likely find that a 2.5% increase simply doesn't do justice to the price pressures they're battling.

Although the CPI-W reflects price movements for a large basket of goods, its full name is Consumer Price Index for Urban wage earners and office workers (note the italics) – means that this is not an index designed to measure inflationary pressures on seniors. Urban wage earners and office workers are typically working-age Americans who are not currently receiving Social Security benefits, and they will spend their money very differently than retirees.

Compared to the average working American, retirees spend a higher percentage of their monthly budget on housing (the largest item in the CPI-W) and healthcare. Unfortunately, the CPI-W does not take into account how important these costs are for the majority of welfare recipients.

And TTM inflation rates for housing and medical care were 5.2% and 3.2%, respectively, for the month ending August, according to the Consumer Price Index for All Urban Consumers (CPI-U). In other words, the two most important costs for retirees are rising significantly more than the COLA they are expected to receive in 2025, virtually ensuring that the purchasing power of a Social Security dollar will decline again.

To make matters worse, the Medicare Trustees Report released in May predicts a 5.9 percent increase in monthly Part B premiums to $185 next year. Part B is the part of Medicare that covers outpatient services, and those premiums are often deducted from Social Security checks for beneficiaries age 65 and older (the traditional eligibility age for Medicare).

If the Medicare Trustees' estimate proves correct, Part B premiums would have increased 5.9% for the second year in a row. This would almost certainly minimize the impact of next year's 2.5% COLA for the majority of Social Security beneficiaries.

Although the situation may change slightly in the coming weeks, a disappointing COLA disclosure is likely in store for 2025, preparing retirees for the dreaded purchasing power double whammy.