The Social Security COLA for 2025 Is Shaping Up to Be a Double-Edged Sword, but It Could Be Worse

Over 50 million Americans receive Social Security retirement benefits. Some of these retirees use Social Security solely as supplemental income to their retirement savings and investments, but millions rely heavily on the checks for their daily living expenses. That's why the importance of Social Security can't be overstated.

Many would agree that regardless of how beneficial Social Security is, it's not the easiest social program to navigate, given all the moving parts and changes that seem to happen year after year. One change that people look forward to each year, however, is the cost-of-living adjustment (COLA).

Although the official Social Security COLA number is not released until October, estimates can give people a sense of what to expect. The estimates for 2025 are shaping up to be a double-edged sword.

Two people at a table looking at a tablet.

How Social Security's COLA works

All it takes is a simple trip to your neighborhood store to see the effects of inflation. Everything from eggs to deodorant to medication has noticeably increased in price over the years. To ensure retirees don't lose too much of their purchasing power from their Social Security checks, Social Security adjusts benefit amounts annually to account for inflation.

To determine the COLA for a given year, Social Security uses the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), a monthly inflation measure that considers items like housing, food, and medical care.

Social Security averages the CPI-W for the third-quarter months (July, August, and September) and compares it to the previous year's numbers to determine the COLA for the upcoming year. For example, the third-quarter CPI-W average was 301.236 in 2023 and 291.901 in 2022. This 3.2% difference became the 2024 COLA, which took effect beginning in January 2024.

If the CPI-W numbers are lower than the previous year's, no COLA will be made, and benefits will remain the same. It's not common, only occurring three times since 1975.

Why the 2025 COLA is on pace to be a double-edged sword

Senior advocacy group The Senior Citizens League (TSCL) estimates the 2025 COLA could come in around 2.66% (I'll round it up to 2.7%). The average monthly benefit for retired workers in April was $1,915, meaning a 2.7% increase would bring the average benefit to around $1,967. That's just over $23,600 per year.

Since the COLA became annual in 1975, the average increase has been 3.77%. In the past two years, retirees have been spoiled a bit, with the COLAs coming in at 8.7% in 2023 and 5.9% in 2022. Of course, these amounts were only that high because inflation was also at levels not seen in many years, but it was a nice increase for many.

While any increase in payments is good news for retirees, the downside is that even with the adjustment, many may find that Social Security checks alone may not be enough to fully cover their living expenses. This is especially true when you consider that healthcare costs, one of the largest expenses for seniors, are rising quickly. For perspective, PwC's Health Research Institute estimates a 7% increase in medical costs in 2024, more than double this year's COLA.

While it may be a little later than preferred for some, the issues of the Social Security COLA not being sufficient further highlight why it's important to approach retirement savings from different angles. Not everyone has access to a 401(k) throughout their career, but other sources, such as an IRA and investments, can help provide financial security in retirement.

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