Social Security COLA 2025

Social Security COLA 2025: How Much Will Payments Increase Next Year?

As of September 2024, predictions for the Social Security COLA (Cost of Living Adjustment) in 2025 are starting to emerge. Here’s what is being discussed and how this compares to the past 50 years. Retirees might be anticipating increases in their Social Security benefits, but many are wondering how much the bump will be.

What is COLA?

As a reminder, the COLA for Social Security is an increase in the benefits recipients collect to help keep up with inflation. The cost of living adjustment for Social Security is based on the average inflation rate for Q3, which includes the months of July through September.

How 2024 Inflation Trends Impact COLA

In 2024, inflation has been trending down, with many people not happy about this as they still face high costs for living essentials. Here’s a breakdown of inflation in 2024:

• January: 3.1%
• February: 3.2%
• March: 3.5%
• April: 3.4%
• May: 3.3%
• June: 3.0%
• July: 2.9% (the lowest reading of the year so far)

How Social Security Determines COLA

Social Security determines the COLA using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). This CPI-W takes into account everyday household items like transportation, food, and groceries, and is calculated based on urban family expenditures. While some argue that CPI-W isn’t an accurate reflection for retirees, legislation to change this metric hasn’t yet passed.

Why Retirees May Be Disappointed

Unfortunately, current predictions suggest that the 2025 COLA may not be very high when compared to the past 50 years, as inflation readings have been lower in recent months. While official COLA numbers won’t be released until October, the Senior Citizens League suggests that the projected increase could be below expectations for many retirees. With inflation still affecting everyday expenses, some are questioning whether these adjustments will be enough.

COLA Predictions for 2025

As the COLA predictions are known for their accuracy, the group’s predictions are far from foolproof. They have been off from time to time, but they can give retirees a broad idea of what to expect to help them get a jump start on their financial planning.

Now, in its latest predictions released on August 14th, after we received the data readings, the Senior Citizens League projected that the 2025 COLA would be 2.57%, down from 2.63%, which was projected the previous month. Since Social Security’s COLA only goes over one decimal place, let’s meet in the middle and say that right now it is at 2.6%. They’re saying a 2.6% increase for 2025, which a lot of people are saying will not cut it.

How the 2025 COLA Compares to the Past 50 Years

A 2.6% COLA would be the smallest since 2021. The good news is that inflation has cooled down over the past couple of years, but the bad news is that it would be the smallest COLA since 2021. It’s kind of a bittersweet trade-off.

A 2.6% increase would also be less than 3.4%, which is the average since 1975. To give you more perspective, here are the largest five COLAs since 1975:

• 1980: 14.3% increase
• 1981: 11.2% increase
• 1979: 9.9% increase
• 2023: 8.7% increase
• 1975: 8% increase

This information comes directly from the Social Security Administration.

The Lowest Increases Since 1975

In some years, there were even zero or minimal increases:

• 2010, 2011, 2016: 0% increase
• 2017: 3% increase
• 1987, 1999, 2021: 1.3% increase
• 2003: 1.4% increase
• 2014: 1.5% increase

We’re definitely closer to the lower end and actually below the average according to the Social Security Administration’s numbers. A 2.6% COLA wouldn’t be the worst, but many Social Security recipients would appreciate a larger figure.

What’s Next?

The official 2025 COLA will be announced in October. Retirees should be prepared for a modest increase, and it is wise to manage financial planning accordingly. The next CPI data release on September 11th will give a clearer picture of what to expect.

How is the COLA Calculated?

The Social Security Cost-of-Living Adjustment (COLA) is a crucial factor in determining benefit changes each year. Here’s a breakdown of how the COLA is calculated based on the provided information.

Understanding the COLA Process

The Social Security Administration calculates the annual COLA based on inflation data. Specifically, it uses the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). This index measures the prices of items that consumers regularly buy.

Before 1975, Congress determined that Social Security increases were not always reliable. For the first decade, there were no benefit increases, and then significant hikes occurred in the 1950s. In 1975, the law changed to tie Social Security increases to the CPI-W.

How COLA is Calculated

The Bureau of Labor Statistics tracks the CPI-W. To determine COLA, they focus on data from the third quarter (July, August, and September) of each year. They compare the current year’s third-quarter data to the previous year’s. The percentage difference between these numbers is the COLA increase.

For example, the CPI-W includes various categories like food and beverages, which account for 15% of the index. Subcategories such as pork and pork chops are also part of the calculation, although they make up a small fraction of the index.

CPI-W and COLA Calculation Overview

Key Factor	Description
CPI-W	Tracks price changes for goods/services like food, energy, and medical care. Reported monthly by BLS.
Relation to CPI	CPI-W is a subset of the broader Consumer Price Index (CPI), which measures overall inflation.
August 2023 CPI	CPI increased 2.5% year-over-year in August 2023, down from 2.9% in July.
COLA Calculation	SSA compares the average CPI-W for the third quarter (July, August, September) to the previous year’s data.
2023 CPI-W Increases	– July: 2.6%– August: 3.4%– September: 3.6%
2024 COLA	3.2% higher than the third quarter of 2022, leading to a COLA adjustment for 2024.
Historical COLA	– 2001-2020 Average: 2.2%– Largest: 14.3% in 1980– No COLA in 2009, 2010, 2015 due to no inflation

When is COLA Applied?

COLA increases are applied in December and reflected in January’s benefits. However, COLA doesn’t apply to future benefits until you reach your “benchmark year,” which is the year you turn 62, become disabled, or die. Before that, benefits are adjusted based on changes in national wages.

The COLA increase applies to your Primary Insurance Amount (PIA), which is your full retirement age benefit amount. This amount is adjusted for inflation and any early or late filing adjustments.

Social Security’s 2025 COLA: Anticipation Amidst Mixed Sentiments

Social Security’s upcoming cost of living adjustment (COLA) may offer a rare instance where history is made, but disappointment is the end result for most retirees. Social Security is more than just a check—it represents a necessary source of income that most retired worker beneficiaries couldn’t live without. Over the last 23 years, national pollster Gallup has been surveying seniors to determine how reliant they are on their Social Security benefits. At no point in this more than two-decade stretch of annual polling has the percentage of retirees needing their Social Security income to make ends meet fallen below 80%.

In 2024, 88% of retirees noted their Social Security benefit represents either a major or minor source of income. Given the key role America’s top retirement program plays in laying a financial foundation for America’s aging workforce, it should come as no surprise that Social Security’s COLA reveal, slated for October 10 at 8:30 a.m. ET, is the most awaited announcement of the year. As we’ve moved closer to this reveal, the 2025 COLA forecast has meaningfully narrowed, offering both promise and disappointment to beneficiaries.

Social Security’s COLA is the mechanism the Social Security Administration (SSA) uses to adjust benefits year-to-year to account for changes in the price of goods and services. For example, if a broad basket of goods and services that are regularly purchased by seniors cumulatively increases in price by 2%, 3%, or 5%, Social Security benefits should ideally rise by a commensurate amount to ensure that no purchasing power is lost. The annual COLA aims to keep the program’s beneficiaries on par with inflation, i.e., rising prices they’re contending with.

From the first mailed retired worker benefit check in January 1940 through 1974, adjustments to benefits were completely arbitrary and passed along by special sessions of Congress. Following no COLAs during the entire 1940s, 11 rather large adjustments were administered from 1950 through 1974. Starting in 1975, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) was tasked with tracking inflation for Social Security and effectively became its inflationary tether responsible for determining the annual COLA. The CPI-W has more than a half-dozen major spending categories and a laundry list of subcategories, all of which have their own respective percentage weightings. It’s these weightings that allow the CPI-W to accurately measure the changes in the cost of living for Social Security beneficiaries.

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