What to know about this year's Social Security cost-of-living adjustment

Tens of millions of older Americans will see an increase in benefits in January when a new cost-of-living adjustment is added to Social Security payments.

The 2.5% increase is intended to help meet higher prices for food, fuel and other goods and services. The average recipient will see an increase of about $50 per month, according to agency officials. Social Security recipients received a 3.2% increase in their benefits in 2024, and some retirees are concerned that the increase for 2025 is not big enough to meet their needs.

The Social Security Administration will begin notifying recipients about their new benefit amount by mail starting in early December. Adjusted payments to nearly 7.5 million people receiving Supplemental Security Income will begin Dec. 31. Supplemental Security Income provides monthly payments to adults and children who have income below specific financial limits and qualify to receive Social Security benefits.

Here's what to keep in mind.

How does Social Security work?

About 72.5 million people, including retirees, disabled people and children, get Social Security benefits.

The program is funded by taxes on income subject to Social Security payroll taxes. The government uses taxes from working people to pay benefits to people who have retired, people who are disabled, the survivors of workers who have died, and dependents of beneficiaries. In 2025, the Social Security payroll tax will be assessed on the first $176,100 of income, up from $168,600 this year.

While the money is used to pay people currently receiving benefits, any unused money goes to the Social Security trust fund. Some of the money in the trust, together with the Social Security contributions of people in the workforce, pays for future benefits.

To determine the amount of Social Security a person will receive, the government calculates a percentage of their highest wages from their top 35 years of earning, factoring in when they choose to start receiving benefits.

How is the cost-of-living adjustment calculated?

The cost-of-living adjustment, or COLA, is calculated according to the Bureau of Labor Statistics' Consumer Price Index, but there are calls to use a different index — one that measures price changes based on the spending patterns of the elderly — such as health care, food and medicine costs.

The smaller increase for 2025 is because inflation is slowing. That means prices aren't increasing as fast as they were at the height of the COVID pandemic. Recipients got a historically large 8.7% benefit increase in 2023 because of record high inflation.

Is the trust running out of money?

Future problems with the Social Security trust fund have long been predicted, largely because of demographic shifts. As birthrates decline, fewer people become workers, which results in fewer payments of payroll taxes. Meanwhile, more baby boomers are retiring and collecting Social Security.

The annual Social Security and Medicare trustees report released in May said the program's trust fund will be unable to pay full benefits beginning in 2035. If the trust fund is depleted, the government will be able to pay only 83% of scheduled benefits, the report said.

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