Social Security’s 2025 cost-of-living adjustment (COLA) projections continue to rise, which isn’t good news for most retirees.
In April, nearly 51 million retired worker beneficiaries received Social Security checks that averaged $1,915.26. While that’s not a groundbreaking amount of monthly cash, Social Security benefits have proven essential to the financial well-being of most retirees.
In addition to lifting approximately 16.5 million seniors age 65 and older out of poverty in 2022, a survey conducted by national polling company Gallup in April of this year found that Social Security benefits are the “primary” or “secondary” source of income for 88% of retirees. Given how important Social Security benefits are to the economic foundations of retirees, attention is beginning to turn to the 2025 Cost of Living Adjustments (COLAs).
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Why are Social Security’s cost-of-living adjustments so important?
Simply put, the Social Security COLA is a tool the Social Security Administration (SSA) uses to reflect changes in the prices of goods and services. For example, if the prices of a wide range of goods and services that seniors regularly purchase rise from one year to the next, in an ideal situation, your Social Security benefit would increase by a corresponding amount so that your purchasing power doesn’t decrease. Keeping your benefits in line with inflation is the purpose of the Social Security COLA.
Prior to 1975, cost-of-living adjustments were entirely arbitrary and passed in special sessions of Congress. Only 11 benefit increases were passed between 1940 and 1975, and none were implemented throughout the entire 1940s.
That all changed in 1975. For nearly the past half-century, the Consumer Price Index for Urban Wage Earners and Clerical Employees (CPI-W) has served as the program’s annual inflation measure. The CPI-W has more than six major spending categories and numerous subcategories, each with its own weighting. These weightings allow the CPI-W to be reported as a single number each month that can be easily compared to the previous month or year to determine whether inflation (rising prices) or deflation (falling prices) has occurred.
The Social Security Administration’s COLA calculation is unique in that only the third quarter (July through September) CPI-W value is considered in the calculation. The final values for the other nine months are useful for identifying price trends, but are not used when SSA calculates the Social Security Administration’s COLA for the following year.
Simply put, if the average CPI-W for the third quarter of this year is higher than the average CPI-W for the same period last year, inflation is occurring and recipients will receive more benefits. The year-over-year percentage change in the average CPI-W for the third quarter (rounded to one decimal place) determines how much your Social Security benefits will increase next year.
Rising inflation would mean higher Social Security payments in 2025. US Inflation Rate data Y Chart.
How much Social Security benefits are projected to increase in 2025
Over the past three years, Social Security recipients have seen big increases in their monthly benefits due to cost-of-living adjustments: 5.9% (2022), 8.7% (2023), and 3.2% (2024). For reference, the average COLA over the past 20 years has been 2.6%. Recipients can expect an above-average increase in 2025.
On May 15, the U.S. Bureau of Labor Statistics released its long-awaited inflation report for April, offering some clues as to which direction prices might head in the future. The CPI-W rose 3.4% over the past 12 months, still well above the Federal Reserve’s long-term target of 2% inflation.
With core inflation, which excludes food and energy costs, remaining stubbornly high, the Senior Citizens League (TSCL), a nonpartisan senior citizens advocacy group, has once again raised its long-range projection for Social Security’s 2025 COLA. While we haven’t yet reached the months that actually matter in the COLA calculation, TSCL projects that the 2025 COLA will be 2.66% (rounded up to 2.7%). If correct, this would mark (just barely) four consecutive years of above-average COLAs for recipients.
But it’s one thing to see a percentage projection on paper, and quite another to see how that percentage will specifically affect your Social Security benefits. With COLA projections still in flux, let’s take a closer look at how much a 2.7% cost-of-living adjustment would increase Social Security benefits in 2025.
As we mentioned earlier, for retired workers who took home an average check of $1,915.26 in April, a 2.7% COLA would equate to an increase of $52 per month next year, meaning that if this projection is accurate, the average retired worker beneficiary would be taking home about $1,967 each month.
Disabled workers and survivors will also see a big boost to their monthly benefits. The roughly 7.25 million disabled workers who received benefit checks in April will see their monthly benefits increase by an average of $42 to $1,579, while the 5.8 million survivors will see their monthly benefits increase by $41 to $1,544.
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Keep the champagne chilled on ice
Most indications are that Social Security recipients are enjoying above-average cost-of-living adjustments for the fourth consecutive year, but the COLA for 2025 will be no cause for celebration. While benefits will likely increase due to rising inflation, the costs that matter most to seniors are rising at an even faster pace.
For example, seniors dedicate a higher percentage of their monthly expenses to housing and health care services than the average working-age American. Rising mortgage rates have brought the housing market to a virtual halt, and housing inflation has remained stubbornly high (5.5% over the past 12 months, based on the All-City Consumer Price Index (CPI-U)). A slightly higher-than-average cost of living won’t help if housing inflation remains well above historical norms.
Similarly, health services inflation has recovered over the past six months and is now up 2.7% over the past 12 months.
The pace of increase in shelter and medical services suggests that the pricing power of social security payments will decline in 2025 for seniors, who make up about 86% of social security recipients. A May 2023 TSCL study found that the purchasing power of social security payments plummeted 36% between January 2000 and February 2023.
Unfortunately, there is no easy fix to the continued decline in purchasing power for the majority of the program’s recipients. The CPI-W is inherently flawed, focusing on the spending habits of working-age Americans, who often do not receive Social Security benefits and who spend their money very differently than seniors. Without change in Congress, Social Security recipients seem doomed to disappointment as the 2025 COLA approaches.
