Every year, Social Security benefits are adjusted to reflect rising living costs through a process known as the cost-of-living adjustment (COLA).
This is designed to help retirees and other beneficiaries keep up with inflation. The Social Security Administration will announce the official COLA for 2025 on Thursday, October 10, shortly after the Department of Labor releases its September inflation data.
However, there is widespread concern that the 2025 COLA will not be good news for those who rely on Social Security. In fact, it is likely to deliver a mix of bad and even worse news. This is what is expected.
2025 COLA Adjustment for Social Security
The initial bad news is that the upcoming COLA for Social Security benefits may be the smallest increase since 2021. The annual COLA is calculated using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), a subset of the broader Consumer Price Index (CPI).
The CPI-W for the third quarter (July through September) of the current year is compared to the CPI-W for the same period last year. The percentage increase from this comparison determines the COLA for the following year.
Because the Social Security Administration relies on third-quarter data, the exact COLA for 2025 will not be known until the Labor Department releases September’s inflation figures.
However, based on current trends, the Senior Citizens League (TSCL), a nonprofit organization that advocates for seniors, predicts a 2.6% increase in Social Security benefits in 2025. While any increase may appear positive, this figure is disappointing, particularly for those who are already struggling financially.
To put this in context, over the last three years, Social Security recipients have received significantly higher COLAs: 5.9% in 2022, 8.7% in 2023, and 3.2% in 2024. As a result, the anticipated 2.6% COLA for 2025 represents a significantly smaller increase and would be the most modest adjustment since 2021.
This news may be unwelcome to many retirees, particularly those who are already struggling financially. However, there is a larger issue at hand that complicates the situation even further.
The bad news is that Social Security benefits are expected to lose more purchasing power by 2025. According to TSCL, Social Security benefits have already lost approximately 20% of their purchasing power since 2010, and this decline is primarily due to the fact that COLAs have not kept up with actual inflation experienced by beneficiaries.
The CPI-W, which is used to calculate COLAs, is at the heart of the problem, and it appears that things will only get worse.
The CPI-W measures inflation in eight broad product categories, weighting each category according to the spending habits of urban wage earners and clerical workers. However, this group is typically younger and spends differently than Social Security-eligible retirees.
For example, younger workers tend to spend more on transportation and education, whereas retirees spend more on housing and medical expenses. The problem is that the CPI-W does not accurately reflect retiree spending habits, which can lead to underestimation of the inflation that Social Security recipients face.
In practice, this means that the CPI-W gives too much weight to categories like transportation and education, where costs have been rising more slowly, and too little weight to categories like housing and healthcare, which are more important to retirees and have been rising faster.
For example, during the first seven months of 2024, the CPI-W increased by 3.1%, while housing costs increased by 4.5% and medical expenses increased by 3.2%. At the same time, transportation costs increased by only 2.8%, while educational expenses decreased by 0.2%.
