The 2025 Social Security Cost-of-Living Adjustment Is On Track To Do Something No One Has Seen This Century

In July, more than 51.2 million retirees received an average of $1,919.40 from Social Security. The program, which was enacted in August 1935 and whose first retirement check was issued in January 1940, is essential to the financial well-being of most older Americans.

For 23 years, the national pollster Gallup has asked retirees about their reliance on income from the main U.S. retirement program. Between 80 and 90 percent of retirees consistently say they need their monthly payment to cover at least some of their expenses.

For retirees, nothing is more important or more anticipated than the reveal of the annual cost-of-living adjustment (COLA), which will take place in less than seven weeks (October 10, 2024). The exciting thing about Social Security’s 2025 annual cost-of-living adjustment is that it is on track to achieve something that no one has seen in this century. But at the same time, it still risks disappointing retirees.

Image source: Getty Images.

What is Social Security COLA and why is it important?

The Social Security cost-of-living adjustment is the mechanism by which benefits are adjusted on a quasi-annual basis to reflect price changes in a broad basket of goods and services.

Imagine for a moment that the price of the goods and services you buy regularly increases by 5% from one year to the next. You would also like your income to increase by 5% so that you can continue to buy the same amount of goods and services. Social Security’s cost-of-living adjustment is the tool that adjusts benefits for inflation to ensure that there is no loss of purchasing power.

Between the first pension check in the mail in January 1940 and 1974, cost-of-living adjustments were entirely arbitrary and enacted by special sessions of Congress. After no cost-of-living adjustments throughout the 1940s, 11 adjustments were made between 1950 and 1974.

Beginning in 1975, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) became the annual inflation index used to calculate Social Security’s cost-of-living increases. The CPI-W includes more than a half-dozen major spending categories and a long list of subcategories, each with its own percentage weighting. It is these specific weightings that allow the CPI-W to be expressed as a single number at the end of each month, allowing concise year-over-year comparisons to determine whether prices are rising (inflation) or falling (deflation).

Although the CPI-W is published on a monthly basis, only the values ​​for the last 12 months from July to September are used in the annual COLA calculation. If the average CPI-W value for the third quarter of the current year has increased compared to the average CPI-W value for the comparable period of the previous year, the collective price of goods and services has increased and beneficiaries must receive a cost-of-living adjustment in the coming year.

For the curious, the year-over-year percentage difference in the third quarter (July-September) CPI-W average readings, rounded to the nearest tenth of a percent, determines the amount of the benefit increase the following year (i.e., the COLA).

A significant increase in the US inflation rate has led to three consecutive years of above-average COLAs. US inflation rate data by YCharts.

This would be a first in this century for the adjustment of the cost of living of Social Security.

Since 2010, Social Security COLAs have been mostly anemic. There have been 10 years when COLAs were 2% or less, including the smallest positive COLA in history (0.3% in 2017), and three years when no COLAs were passed through due to deflation (2010, 2011, and 2016).

However, that trend has changed significantly over the past three years. In 2022, 2023, and 2024, Social Security passed through cost-of-living adjustments of 5.9%, 8.7%, and 3.2%, respectively, all of which are well above the 2.6% COLA average over the past 20 years. The 8.7% benefit increase in 2023 was the largest in 41 years in percentage terms.

Following the release of the July inflation report, the nonpartisan seniors advocacy group The Senior Citizens League (TSCL) updated its forecast for the 2025 Social Security COLA to 2.57%, which is 2.6%. This figure is roughly in line with its forecast of 2.63% after the release of the June inflation report, and is a mirror image of its forecast of 2.57% for the 2025 COLA after the release of the May inflation report.

Meanwhile, Mary Johnson, an independent Social Security and Medicare policy analyst who recently retired from TSCL, has lowered her 2025 COLA forecast for a third straight month. Johnson’s forecast that the 2025 Social Security COLA will be 2.6% aligns perfectly with TSCL’s.

While a 2.6% increase in the cost of living would be the smallest percentage increase in benefits in four years, it would be the first time this century that we have seen four consecutive years of cost of living increases of at least 2.6%. The last time that happened was 28 years ago.

For the more than 51 million retired Social Security beneficiaries, a 2.6 percent cost-of-living increase would translate into an average monthly increase of about $50 next year.

By comparison, the average monthly payment in 2025 for disabled workers and surviving beneficiaries is expected to increase by about $40 and $39, respectively.

Image source: Getty Images.

Disappointment looms over retirees

If Johnson and TSCL’s forecast of a 2.6 percent cost of living increase in 2025 is accurate for Social Security, it would mark the fourth consecutive year that living costs have matched or exceeded the 20-year average. You might think that would be a good thing for retirees, but nothing could be further from the truth.

Although the CPI-W is supposed to ensure that older people do not lose their purchasing power, it does not do a satisfactory job.

As the full name of this inflation indicator suggests, it is an index that focuses on the spending habits of “urban wage earners and white-collar workers.” Urban wage earners and white-collar workers are primarily working-age Americans who are not currently receiving a Social Security check. More importantly, they spend their money differently than retirees.

Seniors spend a higher percentage of their monthly budget on housing and medical care than the average American worker. However, the CPI-W does not place greater emphasis on these two spending categories because it focuses on the spending habits of generally younger Americans.

On a 12-month basis, the inflation rate for housing—shelter is the largest weighted component of the CPI-W—and medical care services is well above the forecast that calls for a 2.6% COLA in 2025. In other words, this points to another year when Social Security dollars will lose their purchasing power.

To top it all off, most beneficiaries are likely to see their COLAs reduced or swallowed up entirely by a significant increase in Medicare Part B premiums. This is the segment of Medicare that covers outpatient services.

In May, the Medicare trustees’ report estimated that Part B premiums would increase 5.9% in 2025, to $185 per month. If Part B premiums more than double Social Security’s COLA, the impact of this 2.6% increase in benefits will be limited.

Even though history is being written for the first time in this century, disappointment still hangs over retirees.