Once-historic forecasts for Social Security’s 2025 COLA are unlikely to come to pass.
For a majority of Americans, Social Security income is an absolute necessity during retirement.
In each of the last 23 years, national pollster Gallup has surveyed retirees to gauge how reliant they are on their Social Security check. Consistently, between 80% and 90% of respondents stated that it was a major or minor source of income, including 88% of respondents in 2024. In other words, most retirees lean on their Social Security benefit to cover at least some portion of their expenses.
Taking into account how many seniors count on America’s top retirement program to fortify their financial foundation, no event is more anticipated than the annual reveal of Social Security’s cost-of-living adjustment (COLA).
Although this much-awaited announcement is now less than three weeks away (Oct. 10 is the date to circle on your calendar), hopeful retirees are being forced to say goodbye to a potentially history-making COLA in 2025.
What is Social Security’s COLA, and why is it so important?
In an ideal world, the price we pay for goods and services would never change. But in the real world, the price of almost everything we buy fluctuates over time — often increasing. The cost-of-living adjustment is the tool used by the Social Security Administration (SSA) to ensure retirees don’t lose buying power over time.
As a generalized example, if the price for a broad basket of goods and services regularly purchased by retirees climbs by 4% from one year to the next, Social Security checks should, ideally, also rise by 4% to ensure that beneficiaries can still buy the same amount of goods and services.
In the roughly 35 years following the first benefit check being mailed to retirees, there was no system in place for the SSA to pass along COLAs. Rather, special sessions of Congress were arbitrarily held to dole them out. A total of 11 adjustments were made from January 1940 through December 1974, with no COLAs passed along in the entirety of the 1940s.
Things were modernized in 1975, which is when the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) became the annual measure of inflation responsible for Social Security’s COLA calculation. The CPI-W has eight major spending categories and a plethora of subcategories, all of which have their own respective weightings. These specific percentage weightings allow the CPI-W to be expressed as a single figure, which makes for easy-peasy year-over-year comparisons to determine whether prices are collectively rising (inflation) or falling (deflation).
Although the U.S. Bureau of Labor Statistics (BLS) reports the CPI-W monthly — each report is made up of trailing-12-month (TTM) price data — only TTM readings from the third quarter, July through September, are used in Social Security’s COLA calculation.
If the average third-quarter CPI-W reading in the current year is higher than the comparable period of the previous year, inflation has occurred, and beneficiaries are set to receive a bigger benefit check in the upcoming year.
Determining the amount Social Security checks will increase is easy, too. The year-over-year percentage difference in average third-quarter CPI-W readings, rounded to the nearest tenth of a percent, equals the COLA for next year.
A big uptick in the prevailing rate of inflation has sent COLAs soaring over the last three years. US Inflation Rate data by YCharts.
Say goodbye to your historic cost-of-living adjustment in 2025
Cost-of-living adjustments have been rather anemic since 2010. We’ve witnessed three years during which deflation occurred and no COLA was passed along (2010, 2011, and 2016), as well as the lowest positive COLA on record (0.3% in 2017).
However, the tide began to turn in 2022. A historic increase in U.S. M2 money supply during the height of the pandemic led to the highest prevailing rate of inflation in four decades. Since the COLA is a reflection of the pricing pressure beneficiaries face, Social Security checks soared.
In 2022, 2023, and 2024, beneficiaries enjoyed 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 had been high that the 2025 COLA would make history. It’s been 32 years since four consecutive COLAs hit at least 2.7%, and 28 years since beneficiaries received at least a 2.6% cost-of-living adjustment in four straight years.
Following the July inflation report, the nonpartisan senior advocacy group The Senior Citizens League (TSCL) was forecasting a 2.57% COLA for 2025 (which would round up to 2.6%). Likewise, independent Social Security and Medicare policy analyst Mary Johnson, who recently retired from TSCL, had estimated a 2.6% COLA for next year.
However, the August inflation report from the BLS has retirees saying goodbye to their potentially history-making COLA. With the prevailing rate of inflation continuing to cool, TSCL and Mary Johnson have both lowered their respective COLA forecasts to 2.5% in 2025. This would mark the smallest cost-of-living adjustment in four years and is slightly below the two-decade average COLA of 2.6%.
What would a 2.5% cost-of-living adjustment actually mean for the wallets of beneficiaries? For the roughly 51.3 million beneficiaries, average monthly checks would increase by $48.01.
As for the nearly 7.3 million workers with disabilities and the approximately 5.8 million survivor beneficiaries, the average monthly checks for these two groups would climb by $38.50 and $37.73, respectively, with a 2.5% COLA in 2025.
Retirees might also face the dreaded purchasing power double-whammy next year
On top of kissing a potentially history-making COLA goodbye, seniors are liable to discover that a 2.5% raise simply doesn’t do justice to the pricing pressures they’re contending with.
Even though the CPI-W tracks the price movements for a large basket of goods and services, its full name — the Consumer Price Index for Urban Wage Earners and Clerical Workers (note the italics) — denotes that it’s not an index tasked with measuring the inflationary pressures on seniors. Urban wage earners and clerical workers are usually working-age Americans who aren’t currently receiving a Social Security benefit, and they’re going to spend their money quite differently than retirees.
Compared to the average working American, retirees spend a higher percentage of their monthly budget on shelter (the largest component by weighting in the CPI-W) and medical care. Unfortunately, the CPI-W isn’t factoring in just how important these costs are for a majority of Social Security’s recipients.
And the TTM inflation rates for shelter and medical care, according to the Consumer Price Index for All Urban Consumers (CPI-U), were 5.2% and 3.2%, respectively, for the month ended in August. In other words, the two most important costs for retirees are rising at a rate well above the COLA they are expected to receive in 2025, which all but ensures that the purchasing power of a Social Security dollar will, once again, decline.
To make matters worse, the Medicare Trustees Report, which was released in May, is forecasting a 5.9% increase in monthly Part B premiums to $185 next year. Part B is the segment of Medicare that’s responsible for outpatient services, and these premiums are often deducted from Social Security checks for recipients 65 and older (i.e., the traditional age of eligibility for Medicare).
If the Medicare Trustees’ guess proves accurate, it would mark the second consecutive year that Part B premiums have risen by 5.9%. This would almost certainly minimize the impact of next year’s 2.5% COLA for a majority of Social Security beneficiaries.
Although things could modestly change in the coming weeks, a disappointing COLA reveal that sets retirees up to face the dreaded buying power double-whammy looks to be on tap for 2025.
