Social Security’s cost-of-living adjustment (COLA) for 2025 has been reduced – this is how much the average check is expected to increase next year

For most retirees, Social Security is more than just a check. It is a necessary source of income that most retirees could not live without.

For the past 23 years, national polling firm Gallup has surveyed seniors to find out how dependent they are on their Social Security benefits. At no point in this more than two-decade period of annual surveys has the percentage of retirees who rely on their Social Security benefits to make ends meet fallen below 80%. In 2024, 88% of retirees will say their Social Security benefits are either a “major” or “minor” source of income.

Given the key role America’s premier retirement program plays in providing a financial foundation for America’s aging workforce, it should come as no surprise that the announcement of Social Security’s cost-of-living adjustment (COLA), scheduled for October 10 at 8:30 a.m. ET, is the most eagerly anticipated announcement of the year.

As we get closer to this reveal, the 2025 COLA forecast becomes more narrowed, bringing both promising and disappointing news for beneficiaries.

What is the purpose of the Social Security COLA?

The oft-discussed Social Security COLA is the mechanism the Social Security Administration (SSA) uses to adjust benefits annually to reflect changes in the prices of goods and services.

For example, if a broad basket of goods and services regularly purchased by seniors becomes cumulatively more expensive by 2%, 3%, or 5%, welfare payments should ideally increase by the corresponding amount to ensure that purchasing power is not lost. The annual cost-of-living adjustment is designed to ensure that program beneficiaries keep pace with the inflation (i.e., rising prices) they face.

From the first mailed benefit payment in January 1940 until 1974, benefit adjustments were entirely arbitrary and decided by special sessions of Congress. After no COLAs for the entire 1940s, eleven fairly large adjustments were made from 1950 to 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 prop, responsible for determining the annual COLA. The CPI-W has more than a half-dozen major spending categories and a long list of subcategories, all of which have their own respective percentage weights. These weights allow the CPI-W to be expressed as a single, concise number each month.

Most importantly, only the CPI-W values ​​for the last 12 months, July through September, are included in the COLA calculation. If the average CPI-W value for the third quarter (July through September) in the current year is higher than the average CPI-W value for the comparable period in the previous year, inflation has occurred and benefits will increase.

The increase to be expected is determined by the percentage increase in the average CPI-W values ​​for the third quarter compared to the same period last year, rounded to the nearest tenth of a percent.

The sharpest increase in the US inflation rate in four decades has resulted in three consecutive above-average COLAs. US inflation rate data by YCharts.

The social security cost of living adjustment for 2025 has decreased significantly

Over the past 20 years, the average COLA has been a mediocre 2.6%. This period includes three years of deflation (falling prices) and no COLA being passed through (2010, 2011, and 2016), as well as the lowest positive COLA ever (0.3% in 2017).

However, over the past three years, this weak COLA trend has been somewhat broken. The fastest increase in the prevailing inflation rate in four decades resulted in a COLA of 5.9% in 2022, 8.7% in 2023, and 3.2% in 2024. In particular, the 8.7% cost-of-living adjustment in 2023 was the highest in percentage terms in 41 years.

With the current inflation report from the Bureau of Labor Statistics for July and the inflation report for August due on September 11, the forecasts for the 2025 COLA have narrowed significantly.

The Senior Citizens League (TSCL), a nonpartisan senior advocacy group, earlier this year predicted a paltry 1.4% COLA for 2025. After the July inflation report, that estimate has risen to 2.57%, which by definition would round up to 2.6%.

Meanwhile, independent Social Security and Medicare policy analyst Mary Johnson, who recently retired from TSCL, lowered her 2025 COLA forecast from 3.2% in the April inflation report to 2.6% in the latest report.

Although TSCL and Johnson start at opposite ends of the spectrum, they now virtually agree that the cost of living adjustment will be 2.6% in 2025.

For the average Social Security recipient—nearly 68 million recipients—a 2.6% COLA would mean an additional $46.35 per check, based on the average payout of $1,782.74 in July 2024. However, this benefit increase may vary from person to person and by recipient type.

For retirees, who make up more than 51 million of the program’s nearly 68 million beneficiaries, a 2.6% COLA means an average monthly increase of $49.90.

By comparison, the average check for the approximately 7.2 million workers with disabilities and the nearly 5.8 million survivors beneficiaries would increase by $40.01 and $39.25, respectively, next year.

Image source: Getty Images.

COLA 2025 could make history and disappoint at the same time

Assuming TSCL and Johnson’s joint projections are correct, a 2.6% cost-of-living adjustment would be the smallest percentage increase in four years. While that may sound disappointing, it would still be consistent with the average cost-of-living burden over the past 20 years.

Even more impressive, this would be the first time since 1997 that Social Security’s COLA has reached at least 2.6% for four consecutive years. Cumulatively, benefits will have increased by nearly 22% as of the end of 2021, based on a 2.6% cost-of-living adjustment next year.

While it’s great on paper that benefits are growing faster than at any time in decades, there are also two disappointing findings regarding Social Security’s 2025 COLA.

First of all, a COLA of 2.6% is likely to result in a loss of purchasing power for recipients, which has unfortunately been a common phenomenon since the beginning of this century.

TSCL has published two studies in which they compared cumulative COLAs over selected time periods to the total price increase for a basket of goods and services regularly purchased by seniors. Between January 2000 and February 2023, the company estimates that the purchasing power of a Social Security dollar has declined by 36%. In a separate study published in July 2024, TSCL found that the purchasing power of Social Security benefits has declined by 20% since 2010.

With inflation rates for two of the most important cost factors for seniors – housing and medical care – well above 2.6% over the past 12 months, a loss of purchasing power seems almost certain.

Another disappointment is that Medicare Part B premiums have risen rapidly for the second year in a row. Part B is the part of Medicare that covers outpatient services.

In May, the Medicare Trustees Report projected that monthly Part B premiums would rise to $185 in 2025, an increase of 5.9%, which is the same percentage increase in 2024.

Most Social Security beneficiaries enrolled in Medicare will have their Part B premiums automatically deducted from their monthly benefits. In other words, a second consecutive year of no positive Medicare Part B benefits will minimize the impact of Social Security’s upcoming COLA.

Next year could be one of those rare moments when history is made, but disappointment looms.