Next year’s COLA will be official next month, but it’s already coming into focus today.
The Bureau of Labor Statistics (BLS) just released the second of three data points that will determine how much more retirees will receive in Social Security retirement benefits next year.
The annual Social Security cost-of-living adjustment, or COLA, is an important feature of the program. Many retirees rely on the annual bump in benefits to help make ends meet and keep up with the rising costs of everyday life. Last year, Social Security increased benefits by 3.2%.
Seniors may be disappointed to learn this year’s COLA is on track to come in a bit lower than last year’s. The Social Security Administration takes the year-over-year change in the average inflation reading during the third quarter to determine the next year’s adjustment. Through the first two months of the quarter, average inflation has climbed just 2.6%. But September’s year-over-year increase could be come in below that number, pushing the 2025 COLA even lower.
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The details of the 2025 Social Security COLA
As mentioned, each year’s COLA is determined by measuring the average increase in inflation during Q3. Specifically, the Social Security Administration uses a measure called CPI-W, which measures the increased cost of living for urban wage earners and clerical workers.
The formula is simple: It takes the average CPI-W reading for the months of July, August, and September, and divides that number by the average CPI-W reading for the same months a year prior. The readings usually come out in the middle of the second week of each month. The BLS just released the data for August, and here’s where things stand today.
| Year | July | August | September | Average |
|---|---|---|---|---|
| 2023 | 299.899 | 301.551 | 302.257 | 301.236 |
| 2024 | 308.501 | 308.640 | N/A | N/A |
Data source: Social Security Administration and Bureau of Labor Statistics.
As mentioned, the average year-over-year increase in CPI-W through the first two months of the quarter was 2.6%. But a big 0.2% monthly increase in the reading last September will likely mean a lower year-over-year increase in the reading for this September. Even with a similar monthly increase as last year, the average for the quarter will only result in a COLA of 2.5%.
At this point, it’s very likely retirees will see a 2.5% COLA next year. The Senior Citizens League updated its forecast with the same number. That said, we won’t know for certain until Oct. 10 when the BLS releases the September CPI-W reading. Any number between 308.662 and 309.610 will result in a COLA of 2.5% due to rounding.
The 2025 COLA will leave many retirees worse off
If the numbers come in as expected, a 2.5% COLA means the average retiree will see a $48 increase in monthly benefits. That’s based on the average retired workers benefit of $1,920 the Social Security Administration paid last month.
Importantly, Social Security recipients likely won’t see the entirety of that $48 increase end up in their monthly checks. That’s because the Social Security Administration may withhold part of your benefits to pay for taxes or Medicare Part B premiums.
Many seniors face the reality that more and more of their Social Security benefits become subject to income tax every year. That’s because income thresholds determining what percentage of benefits are taxable haven’t been adjusted for inflation in over 30 years. As a result, taxes could cut into the increase in your monthly benefits check.
Additionally, the Medicare premium increase could be a rude awakening for many. The Medicare Board of Trustees estimated that Part B premiums could climb $10.30 in 2025, reaching $185 per month. That’s going to eat away over 20% of the average monthly benefit increase. 2025 Medicare premiums won’t be announced until mid-October.
The rising cost of Medicare points to a significant challenge for retirees. Many are seeing their real cost of living increase faster than their Social Security COLA. Medical costs are a big part of seniors’ budgets, and they’ve been rising faster than average inflation. Housing is another big budget category for many, and the housing component of inflation is also climbing faster than the total average. As such, many retirees are forced to tighten their budgets as their Social Security checks fail to keep up with their core necessities.
The good news for seniors is the economy is showing signs of returning to slow and steady inflation. Historically, low and stable inflation has resulted in an increase in the buying power of Social Security checks. Unfortunately, it looks like retirees will have to wait until at least 2026 to get some relief.