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What to Expect with the 2025 Social Security COLA Adjustment

Annual increases in Social Security benefits have ranged from 0% to 8.7% in recent years. The 2025 COLA will be at the lower end of this range, reflecting easing inflation.

Russ Wiles
| Republic of Arizona

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Social Security recipients, including the approximately 1.5 million people living in Arizona, will receive a 2.5% cost of living adjustment (COLA) starting in 2025, increasing the average monthly benefit by about $48. The average payment is currently around $1,920.

The Social Security Administration announced the new rise in inflation on October 10th. COLAs, uncommon outside of Social Security payments, help recipients keep up with rising prices for food, housing, transportation and more. Here's how the new numbers could affect your finances:

What are COLAs?

According to the Social Security Administration, these are annual benefit increases intended to “offset the destructive effects of inflation on fixed income securities.” The increase also applies to disabled and largely indigent retirees who receive SSI or Supplemental Security Income. About 68 million Americans receive COLAs for their retirement benefits and 7.5 million receive them for SSI benefits. Some people are receiving both, bringing the total number of people affected to 72.5 million, the Social Security Administration said.

Are COLAs automatic?

Yes. Before 1972, Congress had to approve increases, which it did from time to time. Since then, COLAs have been automatic, although there are occasional years in which no increases are granted, due to little or no inflation during those periods.

How are COLAs calculated?

Social Security COLAs reflect changes in an inflation indicator called CPI-W from the third quarter of one year to the third quarter of the next. Based on the latest release from the Bureau of Labor Statistics, the CPI-W increased 2.5% in July-September 2023 compared to July-September this year.

The official name for CPI-W is the Consumer Price Index for Urban Wage Earners and Office Workers. It is slightly different from another widely used measure of inflation, the CPI-U, or the Consumer Price Index for All Urban Consumers.

How has inflation changed recently?

Many Americans are struggling to make ends meet, but inflation has slowed in recent years, so COLAs have also declined. The COLA announced in 2023 and payable this year was 3.2%, after rising sharply by 8.7% in 2022 – the largest increase since 1981. Inflation measures the change in prices, not whether they are cheap or expensive in the eye of the beholder.

And while 2.5% may seem paltry, “it's really in line with what we've seen over the last 20 years,” said Lisa Featherngill, national director of wealth planning at Comerica Wealth Management.

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What percentage of retirees depend primarily on Social Security?

For 40% of older Americans, it is the primary source of income, said Jo Ann Jenkins, CEO of AARP. COLAs are critical for these people and ensure they have “an inflation-protected source of income in retirement,” she said.

What else can people do to make ends meet?

Featherngill thinks this is a good time to take a close look at your cash inflows and outflows, especially before the Christmas shopping pressures arise. What expenses could you save or implement, she asked, citing cable television or car or household contents insurance as options. Budgeting programs like those available on Quicken or Credit Karma can be helpful, she added.

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Are investments associated with COLAs?

Generally no, although some have inflation protection. An obvious example is TIPS (Treasury Inflation Protected Securities), bond-like investments of the federal government. Some other assets, such as broadly diversified stock portfolios, have also outperformed inflation for many decades, although not with the certainty or predictability of Social Security COLAs. In addition, gold and some other commodities are considered inflation protection.

Do COLAs worsen Social Security’s already precarious funding status?

Yes, they do, as this represents significant new expenditure for the program. Social Security is expected to reach its limits in 2033. At that point, benefits could be cut to 79 cents on the dollar compared to today's levels. Congress can shore up the program by cutting benefits, raising taxes, or a combination of both, but so far politicians have shown no resolve to make these tough decisions.

Both presidential candidates, Donald Trump and Kamala Harris, have promised to protect Social Security, but neither has presented a meaningful plan to do so, the Committee for a Responsible Federal Budget said. In fact, Trump's proposal to eliminate partial taxation of Social Security benefits would worsen the program's finances, the group said.

The Social Security Trust Fund is expected to be depleted by 2033. Then, without reforms, benefits would be cut by 21%. The committee estimates that for a typical two-income couple retiring at that time, this would result in a reduction in annual benefits of $16,500.

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