Social Security’s historic 2025 cost-of-living adjustment set to deliver a trio of disappointments

For most American retirees, a Social Security check is more than just a piece of paper. It represents a vital source of income that the vast majority of people 62 and older would struggle to live without.

For 23 years, the national pollster Gallup has surveyed retirees to gauge how much they depend on the income they receive from America’s main retirement program. Consistently, between 80% and 90% of retirees rely on their monthly payment to cover at least some of their expenses. In Gallup’s 2024 survey, only 11% of respondents said their Social Security income was not necessary.

Nothing matters more to the 86 percent of Social Security recipients age 62 and older than the release of the annual cost-of-living adjustment (COLA), scheduled for October 10.

While the 2025 Social Security cost-of-living increase is set to make history, it also appears destined to bring its share of disappointments to seniors.

Image source: Getty Images.

What is the Social Security COLA for and how is it calculated?

In a perfect world, the price of the goods and services we buy would stay the same, and we would never have to worry about our wages, salaries, or Social Security benefits not keeping up with inflation (rising prices). But in the real world, the price we pay for all sorts of goods and services is dynamic. The purpose of the Social Security COLA is to ensure that benefits don’t lose purchasing power over time.

Before 1975, cost-of-living adjustments were enacted without cause by special sessions of Congress. After the 1940s, when no adjustments were made to benefits, Congress enacted 11 cost-of-living adjustments from 1950 to 1974.

Beginning in 1975, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) became the inflation measure used by Social Security to calculate annual cost-of-living adjustments. The CPI-W includes more than a half-dozen major spending categories and a multitude of subcategories, all of which have unique percentage weights. These weights reduce the CPI-W to a single digit at the end of a month, allowing for quick and easy year-to-year comparisons to determine whether prices are collectively rising or falling.

Although the CPI-W is reported monthly by the U.S. Bureau of Labor Statistics (BLS), only readings from the last 12 months of the third quarter (July through September) are used in calculating the COLA.

If the average CPI-W for the third quarter of the current year increased compared with the comparable period in the previous year, inflation has occurred and Social Security beneficiaries are on track to see their benefits increase in the following year. The amount of this increase is determined by the year-over-year percentage change in the average values ​​of the CPI-W for the third quarter, rounded to the nearest tenth of a percent.

A rise in the US inflation rate has led to three above-average COLAs in a row. US inflation rate data by YCharts.

Social Security’s 2025 cost-of-living adjustment is about to make history

As of now, nothing is set in stone regarding the Social Security cost-of-living adjustment in 2025. With July already over, we still have two months of inflation data to receive from the BLS before the official COLA is set.

But as we write this, which is before the BLS’s inflation report is released in July, the 2025 COLA appears poised to make history.

Over the past 15 years, Social Security’s cost-of-living adjustments have been mostly forgettable, with two-thirds of cost-of-living adjustments being 2 percent or less. This includes three years without a cost-of-living adjustment (2010, 2011, and 2016)—there are no cost-of-living adjustments when deflation occurs and prices fall year over year—and the smallest cost-of-living adjustment on record (0.3 percent in 2017).

However, the previous three years represented a nice break for beneficiaries. In 2022, 2023, and 2024, COLAs of 5.9%, 8.7%, and 3.2%, respectively, were passed through. The 8.7% increase in the COLA in 2023 represented the largest year-over-year percentage increase since 1982, as well as the largest year-over-year nominal dollar increase for the average retired worker since Social Security was created.

According to the Senior Citizens League (TSCL), a nonpartisan seniors advocacy group, the 2025 COLA is projected to be 2.63 percent, which would be 2.6 percent. That’s in line with the two-decade average of 2.6 percent COLAs, and would be the first time in 28 years that four consecutive COLAs have reached at least 2.6 percent.

Meanwhile, Mary Johnson, an independent Social Security and Medicare policy analyst who recently retired from TSCL, predicts that the 2025 COLA will reach a slightly higher level of 2.7%. That’s 32 years since beneficiaries last received a COLA of at least 2.7% for four consecutive years.

Regardless of whether TSCL or Johnson’s forecasts prove more accurate, both imply that a historic “surge” is expected for beneficiaries in the coming year.

Image source: Getty Images.

A trio of disappointments likely awaits retirees

In nominal terms, a fourth consecutive year of average or above-average COLAs probably sounds fantastic, especially after so many years of below-average benefit increases. But when you add perspective as a key “ingredient” in Social Security’s 2025 COLA, disappointment appears to be the end result for retirees.

The first (and most obvious) problem is that recipients are about to receive their lowest COLAs in four years. While it’s been about three decades since COLAs were this high for four consecutive years, going from an 8.7% increase to 3.2% on an annual basis, and then potentially dropping back to 2.6% or 2.7% the following year, is a real hit to the wallet. For the average retired recipient, a 2.6% or 2.7% COLA would only increase monthly checks by $50 to $52 next year.

The second disappointment for retirees comes in the form of a persistent loss of purchasing power.

Although the CPI-W has done a great job of passing through annual changes in the cost of living since 1975, it is ultimately an inflationary index that tracks the spending habits of “urban wage earners and white-collar workers.” These are typically working-age Americans who do not currently receive Social Security benefits and, importantly, spend their money very differently than older people.

Seniors spend a higher percentage of their monthly budget on housing and health care costs than the average working-age American. Through June 2024, the unadjusted 12-month inflation rate for housing and health care services was significantly higher than TSCL and Mary Johnson’s 2025 COLA estimates.

The TSCL found that social security income has lost 20% of its purchasing power since 2010. A cost of living increase of 2.6% or 2.7% in 2025 will likely exacerbate this loss of purchasing power.

The third blow to retirees is that Medicare Part B premiums (Part B is the segment of Medicare that handles outpatient services) are expected to increase 5.9% to $185 per month in 2025, according to the Medicare trustees’ report released in May. While this is only an estimate, it is highly likely that Part B premiums will, at a minimum, double Social Security’s COLA in 2025.

For many retirees, many of whom are on Medicare and whose monthly benefits are automatically deducted from their Social Security checks, that means most, if not all, of their 2025 COLA could be eaten up by higher Part B premiums.

Even if the 2025 Social Security cost-of-living adjustment becomes history, retirees are once again the big losers.