The first of three numbers the Social Security Administration (SSA) will use to determine the 2025 cost-of-living adjustment (COLA) is in, and it points to a more modest increase in monthly benefit payments next year.
The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) rose by 2.9 percent in July compared to a year ago. The COLA is based on how much that federal inflation gauge changes in July, August and September from one year to the next. The final figure for 2025 will be announced in October.
Based on 2023 inflation figures, the COLA for 2024 increased monthly benefits by 3.2 percent. Alicia Munnell, director of the Center for Retirement Research at Boston College, says continued cooling of inflation could produce a 2025 adjustment of 2.6 percent to 2.9 percent.
“People are still not happy because prices are high,” she says, but “I think we’re working our way out of this inflation situation and the harm that it did.”
Sri Reddy, senior vice president for retirement and income solutions at Principal Financial Group, is also optimistic. “Inflation and core inflation have both appeared to come down and normalize in the first half of the year through June at about 3 percent,” Reddy says. “While July CPI results have come down further, barring any significant macro events, the Social Security COLA for next year should be between 2.75 and 3.25 percent.”
A COLA that matches the 2.9 percent July figure would increase the average Social Security retirement benefit — about $1,870 a month in June 2024 — by $54 a month starting in January 2025. The average monthly survivor benefit ($1,508 in June) would go up by $44, and the average Social Security Disability Insurance (SSDI payment ($1,538 in June) would tick up by $45.
The 2024 COLA boosted benefits by $59 a month for the average retiree. The annual adjustment declined sharply last year in tandem with cooling inflation. The 2023 COLA of 8.7 percent, a byproduct of the sharp spike in consumer prices the year before, was the largest percentage increase since 1981.
“Social Security is generally the only inflation-protected source of income for seniors in retirement,” says David Certner, legislative counsel and legislative policy director for AARP. “Whether the cost of living rises significantly or by modest amounts, AARP has fought for years to protect the COLA, which helps seniors keep up with rising prices throughout their retirement years.”
How is the COLA calculated?
The CPI-W is a measure of price changes for a selection of goods and services, including food, energy and medical care, that is reported monthly by the federal Bureau of Labor Statistics. It is a subset of the Consumer Price Index (CPI), which tracks a broader range of retail prices and is considered the “headline” number in measuring inflation. (The main index was also up 2.9 percent year over year in July, down from 3 percent in June.)
To calculate the COLA, the SSA compares the average CPI-W for the third quarter of each year to the figure for that same period the year before.
In 2023, the CPI-W rose 2.6 percent in July compared to the prior year, 3.4 percent in August and 3.6 percent in September. Over the full quarter, the index was 3.2 percent higher on average than for the same period in 2022, resulting in the COLA that took effect in January 2024.
Does the COLA keep pace with inflation?
Social Security benefits can lag behind inflation during short-term periods of price volatility, depending on whether the CPI is trending up or down, but “over the cycle, it really does protect people,” says Munnell, who has studied the issue.
For example, beneficiaries lost buying power in 2021, when the 1.3 percent COLA — based on low inflation in 2020 — was outpaced by surging consumer prices. That pattern repeated in 2022, when benefits increased by 5.9 percent but inflation reached a 9 percent peak. However, beneficiaries effectively caught up over the last two years as the inflation rate fell.
“The COLA precisely matches national inflation data, meaning it will fully offset the price increases Americans have seen since the last COLA,” says Emerson Sprick, associate director of economic policy at the Bipartisan Policy Center, a Washington, D.C.–based think tank. “Beneficiaries will receive only a moderate adjustment [in 2025] because they have enjoyed relatively stable price levels this year — a welcome change from the past few years.”
Do Medicare costs affect the COLA?
Medicare costs can also affect the COLA’s value as a hedge against inflation. An increase in Medicare Part B premiums in 2025 would offset a portion of the cost-of-living increase for Social Security recipients who have premiums deducted directly from their benefit payments, as do most Medicare enrollees.
In their 2024 annual report, issued in May, Medicare’s trustees estimated the standard Part B premium paid by most enrollees would increase from the current $174.70 a month to $185 next year, effectively lessening the COLA increase by $10.30 a month for affected Social Security recipients. But that figure is preliminary; the actual premium is typically announced in the fall.
Social Security’s trustees, in their annual report this year, projected that absent congressional action to shore up the program’s long-term funding shortfall, benefits could be reduced by 17 percent by 2035. Sprick says that issue should remain top of mind even as beneficiaries anticipate an inflation adjustment.
“I think we can sometimes overemphasize COLAs,” he says. “They are certainly important, but by far the biggest threat to older Americans’ financial well-being is the program’s [projected] financial shortfall.”
Andy Markowitz covers Social Security and retirement for AARP. He is a former editor of the Prague Post and Baltimore City Paper.
ABOV E: Graphic by Rob Dobi for AARP
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