Social Security COLA 2025: What You Need to Know About Next Year’s Benefit Increase

With inflation cooling off, analysts are predicting a more modest increase in Social Security benefits for 2025. The Social Security Administration (SSA) uses the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to determine the annual cost-of-living adjustment (COLA), and the first number is in—suggesting an increase of just under 3%.

In July 2024, the CPI-W rose by 2.9% compared to the previous year. This number, along with figures from August and September, will be used to finalize the COLA for 2025, which will be announced this month. Analysts estimate the COLA for 2025 could range from 2.6% to 2.9%, depending on inflation data from the upcoming months.

What Does This Mean for Social Security Recipients?

If the COLA matches the 2.9% figure from July, it would increase the average Social Security retirement benefit by about $54 per month, starting in January 2025. Survivor benefits would increase by $44 per month, and Social Security Disability Insurance (SSDI) payments would go up by $45.

This is a smaller increase compared to the 2024 COLA, which boosted payments by 3.2%. The annual COLA has been decreasing as inflation cools, following a significant spike in 2023, when the COLA rose by 8.7% due to high inflation rates. That 2023 increase was the largest since 1981, and many beneficiaries are still feeling the effects of higher prices.

How Is the COLA Calculated?

The COLA is calculated by comparing the CPI-W from the third quarter (July, August, and September) to the same period the year before. In 2023, the CPI-W rose 2.6% in July, 3.4% in August, and 3.6% in September. These numbers resulted in the 3.2% COLA for 2024.

Although a potential 3% COLA for 2025 may seem small, it's more in line with pre-pandemic years when inflation was relatively flat. Between 2001 and 2020, the average COLA was about 2.2%. In rare cases, like in 2009, 2010, and 2015, when there was no inflation, there was no COLA increase at all.

Does the COLA Keep Up with Inflation?

Social Security benefits may lag behind inflation during periods of high price volatility, but over time, the COLA generally helps beneficiaries keep pace with the cost of living. For instance, in 2021 and 2022, the COLA lagged behind inflation, but as prices stabilized, beneficiaries caught up with the larger increases in 2023 and 2024.

David Certner, AARP’s legislative policy director, emphasizes the importance of the COLA, saying, “Social Security is generally the only inflation-protected source of income for seniors in retirement. AARP has fought for years to protect the COLA, which helps seniors keep up with rising prices throughout their retirement years.”

How Medicare Costs Can Impact Your Social Security COLA

As we approach 2025, it’s important to understand how Medicare costs, particularly Medicare Part B premiums, can affect the value of your Social Security cost-of-living adjustment (COLA). While the COLA is designed to help offset inflation, rising Medicare premiums could reduce its impact on many beneficiaries.

In their 2024 annual report, Medicare’s trustees projected that the standard Part B premium, which most enrollees pay, is expected to rise from $174.70 per month to $185 in 2025. This increase would effectively lessen the COLA by about $10.30 per month for Social Security recipients who have their premiums deducted directly from their benefits, as most Medicare enrollees do. It’s worth noting that this estimate is preliminary, and the final premium figure will be announced in the fall.

The Bigger Picture

While COLA adjustments are important for helping seniors keep up with inflation, there are larger issues to consider regarding the long-term sustainability of Social Security. According to the Social Security trustees' 2024 annual report, without congressional action to address the program’s funding shortfall, benefits could be reduced by 17% by 2035.

Emerson Sprick, associate director of economic policy at the Bipartisan Policy Center, emphasizes that while COLAs are crucial, the bigger concern for older Americans should be the financial health of the Social Security program itself. “We sometimes place too much emphasis on COLAs,” he explains. “They are certainly important, but the bigger threat to older Americans’ financial well-being is the program’s projected financial shortfall.”

As we look toward 2025, it's important to stay informed about both the upcoming COLA and potential changes in Medicare costs and to remain aware of broader challenges facing Social Security.

Michael Kovacs is a Registered Representative of Realta Equities, Inc. Realta Equities, Inc. is not affiliated with Florida?Retirement Group.??Securities are offered through Realta Equities, Inc., Member FINRA/SIPC,?1201 N. Orange St., Suite 729, Wilmington, DE 19801.