In October, the Social Security Administration will officially announce the 2025 cost-of-living adjustment (COLA), or the percentage Social Security benefits will increase to match the rate of inflation.
Economists are already speculating on what the COLA will be for the coming year. It matters not only to those already receiving Social Security benefits but also to those planning for it.
If you want to enjoy a stress-free retirement , you need to know how much money you’ll receive each month.
Let’s talk about what the 2025 COLA is likely to be and where this number comes from each year.
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1. How COLA is calculated
COLA varies significantly from year to year. The increase is based on the Consumer Price Index (CPI) for Urban Wage Earners and Clerical Workers.
The Bureau of Labor Statistics (BLS) calculates this figure each month but particularly focuses on July through September each year.
The CPI aims to provide accurate average costs for more than 200 of the products most people buy, such as food, transportation, and housing. By tracking this information month-to-month, the Bureau can get a true idea of inflation.
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2. Projected increase for 2025
If you look closely at the CPI figures, inflation is clearly a factor in 2024. For example, from July 2023 to July 2024, the index raised 2.9%. As noted, COLA also looks at the last few months.
Economists speculate that the COLA adjustment will likely range from 2.6% to 2.9% due to the cooling of inflation in the last few months.
3. Historical increases in COLA
The 2025 COLA figure could seem disappointing to some receiving benefits, especially after the adjustments over the past few years.
Inflation began to heavily impact benefits in 2021, leading to a COLA of 5.9% for 2022. Things worsened in 2022, though, and COLA jumped a record-breaking 8.7% for 2023.
Inflationary pressures improved in 2023, significantly slowing the increase in the CPI. The COLA for 2024 was 3.2%. If speculation is right, the COLA for 2025 will be even lower than last year’s figure.
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4. How CPI affects COLA increase
COLA is meant to keep Social Security benefits in line with the actual cost of living. It was put in place in 1975 to ensure that benefits payments go the same distance in meeting necessary financial needs even if inflation rises.
The Consumer Price Index monitors dozens of products and services people purchase, tracking how much everything from food to gas costs from month to month.
That percentage increase is then used to better understand the path of inflation so that when the next year of benefits rolls around, you’re getting enough to keep you in line with inflation.
5. How Medicare costs might be affected
Like everything you’re paying for, your Medicare Part B premium will likely rise in 2025. When Medicare costs rise, seniors have less money in their budget to spend.
The Centers for Medicare & Medicaid Services adjusts the premiums, deductibles, and coinsurance rates. These costs could increase or fall each year.
If Medicare costs rise in 2025, your budget could be smaller even with the COLA increase.
Medicare’s 2024 annual report, issued in May 2024, estimates an expected increase in costs for most enrollees in the year to come, estimating premiums would rise to $185 a month from the current $174.70. That means the COLA’s impact is a bit less.
6. Can all retirees get COLA?
COLA increases apply to eligible retirees, and that includes those receiving Survivor Benefits and beneficiaries who receive a monthly benefit amount. You can only receive the COLA adjustment if you apply for retirement benefits after the age of 62.
That means it applies to most people, including those receiving Supplemental Social Security, which includes older adults with little or no income and those with disabilities.
Make Money: 8 things to do if you're barely scraping by financially 7. Does COLA really keep pace with inflation?
COLA is meant to be as close to accurate as possible. Because the index is tracked monthly, it may be possible to see trends in inflationary pressure from month to month. However, there’s a lag.
In situations where short-term inflation rises due to volatility in product pricing, COLA could be less accurate overall.
Surging consumer prices, like those in 2021 during the pandemic, were not met by the very low 1.3% COLA issued for that year when inflation was very low in 2020.
Bottom line
COLA may not be a big component of your retirement planning, but inflation should be a consideration as you plan your annual retirement budget.
In addition, it’s critical to consider the benefits of delaying retirement, saving more during your lifetime through tax-advantaged plans, and maybe supplementing your income once you retire.
In difficult periods of surging consumer prices, that 12-month gap year-to-year from one adjustment to the next can be hard to manage unless you have made a good financial plan.
Money tips that can work for everyone
No matter what your bank account balance is, there's always an opportunity to optimize and improve your finances. Here's a quick checklist of things you can look at today.
Focus on paying off your debt . Debt can hold you back from making progress with your overall financial well-being. Aside from cutting expenses, there are tools that can help you pay off debt faster like balance transfer credit cards and debt counseling.
Earning extra income can give you breathing room. If finances are tight, earning some extra money to supplement your income can make a huge difference. A new job is one option to consider, but if you're not ready to make a big change or already retired, a part-time side job could be a better choice.
Cut your expenses. It sounds painful and so not fun, but it doesn't have to be. Take a look at your biggest expenses because that's where you'll probably find the biggest savings. For example, auto insurance rates have been soaring so shopping around for a new insurance company can be the fastest way to cut your bill. Also, look for ways to cut your grocery bill (despite rising inflation).
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