Even though Social Security’s cost-of-living adjustment (COLA) may accomplish something not seen in roughly three decades, this historic benefit increase is liable to come up short for most retirees.
In June, the more-than 51 million retired workers who received a monthly benefit from Social Security took home an average of $1,918.28, which works out to a little over $23,000 on an annualized basis. While this might not sound like a lot of money, Social Security income has, for decades, proved vital to helping retirees make ends meet.
In addition to America’s top retirement program pulling 22.7 million people above the federal poverty line in 2022 (including 16.5 million adults aged 65 and over), 23 years of annual surveys by pollster Gallup have shown that 80% to 90% of retirees lean on their monthly payout, in some capacity, to cover their expenses.
With most recipients reliant on their monthly Social Security check, it should come as little surprise that the cost-of-living adjustment (COLA) reveal in October is highly anticipated. Although estimates suggest Social Security’s 2025 COLA will be historic, beneficiaries are still liable to be disappointed.
Why is Social Security’s COLA so important to retirees?
As a consumer, you’re likely aware that the price you pay for goods and services changes over time. The “job” of Social Security’s COLA is to measure these price changes for a broad basket of goods and services, and adjust benefits annually to ensure that recipients don’t lose purchasing power.
Prior to 1975, there was no rhyme or reason to when these adjustments were made. Special sessions of Congress approved just 11 COLAs between 1940 and 1974, with none passed along during the entirety of the 1940s.
Beginning in 1975, America’s leading retirement program began relying on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to measure annual inflationary changes. The CPI-W has more than a half-dozen major spending categories, along with numerous subcategories, all of which possess individual weightings. These percentage weightings are what allow the CPI-W to be expressed as a single figure each month, which makes for quick and clean comparisons to prior months or years.
When calculating Social Security’s cost-of-living adjustment, only trailing-12-month CPI-W readings from the third quarter (July through September) are used. While the final readings from the other nine months can be helpful in spotting price trends, they aren’t used in Social Security’s COLA calculation.
If the average CPI-W reading from the third quarter of the current year is higher than the average CPI-W reading from the comparable period last year, inflation (rising prices) has taken place. When prices rise, so do Social Security benefits. The year-over-year percentage increase in average third-quarter CPI-W, rounded to the nearest tenth of a percent, determines how much benefits rise in the coming year.
Thanks to an above-average rate of inflation, Social Security’s last three COLAs have been meaningful. US Inflation Rate data by YCharts.
How much are monthly benefits going to increase with Social Security’s 2025 cost-of-living adjustment?
Over the last 15 years, COLAs have often landed somewhere between nonexistent and unimpressive. No COLA was passed along in 2010, 2011, and 2016, while in 2017 beneficiaries received the smallest positive COLA on record (0.3%). Altogether, 10 of the last 15 cost-of-living adjustments have been 2% or below.
However, the three most recent COLAs have bucked this trend. In 2022, 2023, and 2024, Social Security checks increased by 5.9%, 8.7%, and 3.2%, respectively. The 8.7% COLA in 2023 was the largest percentage increase in 41 years and the greatest nominal-dollar boost to monthly benefits since the program’s inception. In other words, Social Security’s 2025 COLA has some big shoes to fill — and it might just do that.
Following the release of the June inflation report from the U.S. Bureau of Labor Statistics, estimates were narrowed for Social Security’s 2025 COLA. According to The Senior Citizens League (TSCL), a nonpartisan senior advocacy group, benefits are forecast to rise by 2.63% (which would round to 2.6%) in 2025.
Meanwhile, independent Social Security and Medicare policy analyst Mary Johnson, who recently retired from TSCL, has pegged her forecast for the 2025 COLA at 2.7%.
Though both estimates are below the cost-of-living adjustments from the previous three years, they would, nevertheless, make history. It’s been 28 years since beneficiaries received a COLA of at least 2.6% for four consecutive years and 32 years since payout hikes totaled at least 2.7% in four straight years.
But it’s one thing to discuss percentages and an entirely different animal to talk about what those percentages mean in terms of dollars in the hands of retirees.
For the roughly 51.2 million retired-worker beneficiaries, a 2.6% to 2.7% COLA in 2025 would increase their monthly payout by $49.88 to $51.79. In other words, the average retired-worker check would be near, but still below, $2,000 per month.
By comparison, the 7.2 million workers with disabilities and 5.8 million survivor beneficiaries would see their respective monthly checks increase by ranges of $39.98 to $41.52 and $39.20 to $40.71 if the COLA comes in at 2.6% or 2.7%.
Here’s why retirees keep getting shafted by Social Security’s annual COLA
On a nominal basis, most retirees are liable to be pleased with a fourth consecutive year of above-average COLAs. But if you were to dig beneath the surface and examine the factor(s) responsible for pushing COLAs higher, you’d see that it’s a veritable worse-case scenario for retirees.
Seniors and working-age Americans spend their money very differently. Whereas younger adults would be expected to devote a higher percentage of their monthly budget to education, apparel, and transportation expenses, retirees spend a larger percentage on shelter and medical-care services than the average working-age American.
The CPI-W, which has been tasked with measuring price changes for Social Security for roughly a half-century, tracks the spending habits of “urban wage earners and clerical workers.” These are working-age adults who, in many instances, aren’t receiving a Social Security benefit. By comparison, 86% of Social Security’s nearly 68 million recipients are aged 62 and over. Seniors can’t expect an accurate representation of the inflation they’re contending with when the index responsible for calculating the program’s COLA is focused on the spending habits of working-age Americans.
The equally big problem for retirees is that shelter inflation has remained stubbornly high, and medical-care services inflation has picked up in recent months. Trailing-12-month inflation for shelter and medical-care services, according to the Consumer Price Index for All Urban Consumers (CPI-U) in June, respectively totaled 5.2% and 3.3%. Even if Social Security’s 2025 COLA came in at Mary Johnson’s forecast of 2.7%, it would still be trailing the inflation retirees are contending with from the expense categories that are most important to them.
If the rate of inflation for shelter and medical-care services were to remain above the eventual 2025 COLA, it would result in a loss of purchasing power for most Social Security beneficiaries and continue what’s been a persistent loss of buying power for Social Security income since the start of the century.
Barring a big change over the next eight weeks, retirees are set for another round of history-making disappointment.