Social Security's 2025 cost-of-living adjustment gets 2.5% boost — but many aren't excited

Now that inflation has cooled down, so, too, will the cost-of-living adjustment for 2025 for Social Security benefits.

Social Security beneficiaries will see a 2.5% boost as part of their annual cost-of-living adjustment for 2025, according to the official news announced Thursday by the Social Security Administration. That's down from the 3.2% COLA hike in 2024.

Social Security will mail newly designed notices of the COLA hike in December. The simplified notice is one page and provides the exact dates and dollar amounts of a person’s new benefit amount and any deductions.

The latest inflation data shows that consumers aren't seeing prices rise as rapidly as they did a few years ago.

The much-watched Consumer Price Index increased 0.2% on a seasonally adjusted basis in September, the same as in July and August , according to the announcement made by the U.S. Bureau of Labor Statistics on Thursday morning. Year over year, the CPI increased 2.4% in September before any seasonal adjustment.

The index for food was up 0.4% month to month in September, while the index for shelter was up 0.2%. The energy index fell 1.9% over the month, after declining 0.8% in August.

Gasoline prices were down 15.3% year over year in September, while used car and truck prices were down 5.1% and new car prices were down 1.3%, according to the latest CPI data.

The latest inflation data paves the way for future interest rate cuts by the Federal Reserve.

Seniors also now know what to expect next year for the inflation adjustment to Social Security benefits. Social Security benefits and Supplemental Security Income payments will go up by 2.5% for more than 72.5 million beneficiaries.

On average, according to the agency's news release, Social Security retirement benefits will increase by about $50 per month starting in January. The agency noted that the COLA increase has averaged about 2.6% over the last decade.

Nearly 68 million Social Security beneficiaries will see a 2.5% cost-of-living adjustment beginning in January.  Increased payments to nearly 7.5 million people receiving Supplemental Security Income benefits will begin on Dec. 31. Some people receive both Social Security benefits and SSI.

Those who are working will want to note that some other adjustments that take effect in January each year based on the increase in average wages.  The maximum amount of earnings subject to the Social Security tax is set to increase to $176,100 next year — up from $168,600 currently.

Why some seniors aren't celebrating

Extra money in any check is welcome. But some Social Security experts note that the 2.5% cost-of-living hike won't even cover a week's worth of groceries or a tank of gas for many seniors driving a midsize SUV.

Mary Johnson, an independent Social Security and Medicare policy analyst, said average retiree benefits could be expected to rise by about $48 per month, before any extra costs associated with Medicare. Medicare Part B premiums will go up in 2025. Those premiums will be announced later this year but could go up an extra $10 a month in 2025.

The average Social Security benefit as of August was $1,783.55 a month for all beneficiaries, including survivors benefits and disability benefits. The average for retired workers was $1,920.48 a month, based on monthly statistical snapshot provided by the Social Security Administration.

Cost-of-living adjustments matter a great deal

A cost-of-living increase exists as part of the Social Security system to make sure that people receiving benefits don't lose their purchasing power over time due to inflation. After all, receiving $1,500 or $2,000 in benefits might sound good now but cover very little in 20 years without a COLA boost.

How badly seniors and others feel about inflation, of course, is quite personal. Much depends on their expenses and other sources of income, such as their savings or investments. Or even whether they're still able to generate some income by continuing to work.

Seniors who invested in stocks saw great gains as Wall Street broke new records in 2024. The S&P 500 and Dow Jones Industrial Average hit record closing highs on Wednesday. The Dow closed at 42,512 on Wednesday; the S&P 500 closed at 5,792.04 on Wednesday.

All seniors aren't worrying about the cost of the next cruise, though. Many wonder what they're going to do as their rent has skyrocketed in recent years.

Many sources of income — including many pensions and paychecks — didn't receive automatic cost-of-living hikes as inflation heated up significantly in 2021 and 2022.

So, the total income for some beneficiaries may be lagging behind price increases, said Karen Holden, a professor emerita at the University of Wisconsin-Madison in the La Follette School of Public Affairs and Department of Consumer Science. Her research work has focused on Social Security and the economic status of elderly people.

Some seniors who are on very limited incomes are being hit harder than others by rising prices.

Social Security is a universal program, Holden said, and the benefit structure reflects the lower probability of pension coverage and ability to save of low-income workers.

"But a large universal program cannot take account of differences across households in patterns of expenditures," she said.

Lingering high prices, Holden said, could mean that some seniors may need more information now on how to adjust to inflation or be given access to programs that are designed to deal with specific hardships.

What were the COLA hikes in the past?

Overall, those receiving Social Security benefits saw a string of COLA hikes in recent years that continue to support their purchasing power. And that's a good thing.

In 2023, retirees and others saw an 8.7% COLA bump for Social Security benefits, as well as Supplemental Security Income benefits. That was the biggest inflation adjustment since 1981 when the COLA hike was 11.2%.

In 2022, the cost-of-living adjustment for Social Security benefits was 5.9%.

The cost-of-living adjustment was merely 1.3% in 2021 — making it one of the lowest increases on record since 1975 when Social Security started automatic annual cost-of-living allowances. It was 1.6% in 2020.

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The COLA adjustment for 2025 isn't the lowest ever. Some years with no inflation or very low inflation saw no COLA hikes, such as 2016, 2011 and 2010.

"The COLA is undoubtedly better than nothing, but it won't go far in helping to eliminate the financial struggles of so many of today's retirees," said Shannon Benton, executive director of The Senior Citizens League, a nonprofit advocacy group.

Benton noted that persistent high costs present a significant challenge for people on fixed incomes.

In the past few years as inflation has skyrocketed, we've heard more discussion about whether a different inflation measure that better reflects the purchasing patterns of Social Security beneficiaries should be put into place.

Seniors would benefit, Benton maintains, from efforts to change the calculation for inflation adjustments for Social Security. One such proposal calls using the higher of one of two inflation-related indexes, the currently used Consumer Price Index for Urban Wage Earners and Clerical Workers or opting to use the CPI-W or the CPI-E, a price index that reflects expenses incurred by those 62 and older.

Right now, she said, seniors who are struggling financially should look at other resources in the community to help them cover their needs. Often, she said, a local Area Agency on Aging can offer some guidance about available community resources.

Alicia Munnell, director of the Center for Retirement Research at Boston College, noted in a recent blog that the inflation-adjustments made to Social Security benefits are a valuable part of the program’s design.

"Even an inflation rate as low as 2% cuts the purchasing power of a $1,000 benefit to $600 over a 25-year retirement," she wrote.

"The COLA prevents that erosion. But the lack of drama means that the COLA goes unappreciated."

Munnell acknowledged that some will bemoan that the COLA hike for 2025 is smaller than those in the past few years. "But the adjustment," she wrote, "is designed to compensate for rising prices, so as inflation drops, the magnitude of the required adjustment also falls."

The timing, she acknowledged, was not perfect. "The COLA lagged when inflation took off, but then more than compensated as inflation slowed," she said.

"The important point, however, is that over the entire period, the Social Security COLA has fully protected retirees from the rise in the CPI-W."

The latest inflation spike, she said, has been harmful, but it did highlight the value of having retirement benefits that keep up with prices.

Inflation clearly is cooling down, but many people continue to be frustrated by high prices. The latest COLA hike won't fix everything but it's a help.

Contact personal finance columnist Susan Tompor: stompor@freepress.com . Follow he r on X @tompor.

This article originally appeared on Detroit Free Press: Social Security's 2025 cost-of-living adjustment gets 2.5% boost — but many aren't excited