According to The Motley Fool, No event is more eagerly awaited by Social Security’s over 68 million beneficiaries than the annual reveal of the cost-of-living adjustment (COLA). Most retirees rely on their monthly Social Security check to cover essential expenses, making this announcement crucial for their financial well-being.
Dependence on Social Security
For over two decades, Gallup has conducted annual surveys measuring retirees’ reliance on Social Security as an income source. This year, 88% of retirees reported that it represented either a “major” or “minor” income source, with only 11% stating it was unnecessary. In essence, most Americans would likely struggle without the financial foundation that Social Security provides.
Mark your calendars for October 10—the date when Social Security’s 2025 COLA will be unveiled. With multiple forecasts converging on the expected size of this adjustment, we can estimate how much the average check is likely to rise in the coming year.
The Purpose of Social Security’s COLA
Before delving into the specifics of the 2025 COLA, it’s vital to understand the purpose of this adjustment.
In an ideal world, the prices of goods and services would remain stable, and beneficiaries wouldn’t have to worry about their Social Security income losing purchasing power. However, in reality, the costs of nearly everything we buy fluctuate over time and often increase. The COLA is designed to protect beneficiaries from losing purchasing power due to inflation.
From the first mailed retired-worker check in January 1940 through December 1974, there was no established system for assigning COLAs; instead, Congress passed them arbitrarily. A notable example was the record-breaking 77% COLA approved in 1950.
Beginning in 1975, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) became the tool for calculating annual COLAs. The CPI-W tracks price changes for over 200 goods and services, each with its own weighting, allowing for clear month-to-month and year-over-year comparisons.
How COLA is Calculated
Despite being reported monthly, only trailing twelve-month readings from the third quarter (Q3), spanning July through September, factor into the COLA calculation. If the average CPI-W reading in Q3 of the current year exceeds that of the same period last year, it indicates collective price increases (inflation). Consequently, benefits are raised the following year, based on the year-over-year percentage change in average Q3 CPI-W readings, rounded to the nearest tenth of a percent.
Also read: Social Security Benefit to Increase More Than $2,000 Under New Bill
Expected Increase in Social Security Benefits for 2025
Forecasts for Social Security’s 2025 COLA started with a wide range this year. Initially, the Senior Citizens League (TSCL) estimated a modest 1.4% increase. However, after several updates, TSCL now predicts a 2.5% COLA for 2025.
Conversely, independent policy analyst Mary Johnson had estimated a robust 3.2% COLA based on the April inflation report. This estimate has since been adjusted downward, now aligning with TSCL’s prediction of 2.5%.
While nothing is finalized until the September inflation report, both forecasts currently agree on a 2.5% COLA for the upcoming year.
How the Average Check Will Rise
Using average payout data from August, the average Social Security benefit was $1,783.55. A 2.5% COLA would increase this average check by $44.59 per month.
Variations in increases depend on the type of beneficiary:
- The average retired-worker beneficiary can expect a monthly increase of $48.01, bringing their check to $1,968.49.
- For those on disability, a 2.5% COLA would raise the average benefit by $38.50, resulting in an average check of $1,578.42.
- Survivor beneficiaries should see their monthly payouts increase by $37.73 to $1,547.09.
Although this would be the smallest COLA percentage since 2021, it still surpasses the 2.3% average COLA given over the past 15 years.
COLA’s Effectiveness Compared to Inflation
Despite the anticipated COLA, many retirees find that Social Security adjustments fail to keep pace with rising costs. According to the August inflation report, expenses such as shelter and medical care have surged by 5.2% and 3.2%, respectively, over the past year. These costs significantly impact seniors and are increasing at rates that exceed the anticipated 2025 COLA.
Since the CPI-W reflects spending habits of “urban wage earners and clerical workers”—typically working-age Americans not receiving Social Security benefits—benefits are often outpaced by inflation.
In mid-July, TSCL reported that the purchasing power of a Social Security dollar has declined by 20% since 2010. Moreover, inflation has surpassed the assigned COLA in 10 of the last 15 years.
Rising Medicare Premiums
To add to the financial burden, Medicare’s Part B premium is projected to rise significantly in 2025. The Medicare Trustees Report predicts a 5.9% increase, bringing the premium to $185 per month, mirroring the hike implemented this year. Many retirees aged 65 and over have their Part B premiums automatically deducted from their Social Security checks.
If Part B premiums increase at more than twice the rate of the 2025 COLA, it’s likely that most retirees will experience at least some negation of their cost-of-living adjustment.
While Social Security benefits are set to rise in 2025, the increasing costs faced by retirees present a daunting reality. The expected COLA may offer some relief, but the overall cost to retirees continues to outstrip any potential benefits.
Discover Hidden Benefits
If you’re concerned about your retirement savings, you’re not alone. Many Americans are behind on their retirement planning. Fortunately, there are little-known “Social Security secrets” that could help you boost your retirement income. For instance, one simple strategy could provide an additional $22,924 annually. By maximizing your Social Security benefits, you could retire with greater confidence and financial stability. Click here to learn more about these strategies.
