Social Security's 2025 COLA: There's Good News Ahead for Retirees

Many seniors get most or all of their retirement income from Social Security. Because of this, the program's annual cost-of-living adjustments, or COLAs, are extremely important.

The purpose of the Social Security COLA is to help ensure that benefits keep pace with inflation. And those COLAs are calculated based on inflation data -- specifically, from the third quarter of the year.

Image source: Getty Images.

Based on what we know so far, it's looking like 2025's Social Security COLA will be smaller than the raise seniors received at the start of 2024. But there's some very positive news buried in that projection.

How Social Security COLAs are calculated

Social Security COLAs are tied directly to increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). When there's an increase in the CPI-W during the third quarter of the year, compared to the previous year, Social Security benefits will go up. When there's no increase or a decrease, Social Security benefits will stay the same. They can't decrease from one year to the next.

It's worth noting that some senior advocates feel that the CPI-W isn't a great means of measuring Social Security COLAs. To that end, an alternate measure has been proposed -- the CPI-E, or Consumer Price Index for the Elderly.

An index like this might more accurately reflect the costs that Social Security recipients face, as they might differ substantially from the costs incurred by clerical workers and urban wage earners. And let's also not gloss over the "urban" part. Not all retirees live in urban areas, and many specifically avoid them to keep their living costs low.

But let's get back to the CPI-W. Based on initial inflation data, the current 2025 Social Security COLA estimate is 2.63% . That's below the 3.2% boost retirees got at the start of 2024.

However, a 2.63% COLA is by no means the smallest one on record. And that number has the potential to change, since we're only in the middle of the year's third quarter and don't know what inflation has in store just yet.

But the main reason there's good news on the Social Security COLA front is that a smaller raise is indicative of shrinking inflation. Seniors are now paying less for things like groceries, utilities, and gas. If that trend continues, seniors might still end up benefiting financially, even if 2025's COLA isn't so generous,

Social Security recipients saw their benefits rise by 3.2% at the start of the current year. But if inflation is already easing, it means seniors are now enjoying some relief.

We'll need to wait and see

The Social Security Administration won't announce 2025's COLA until October. Until then, seniors will have to sit tight and be patient.

But even if next year's COLA isn't as large as 2024's, it's not necessarily a bad thing. It's actually quite reasonable to spin that as a good thing because of the positive impact of cooling inflation on seniors' day-to-day purchases.

The Motley Fool has a disclosure policy .