For a majority of retirees, Social Security income is a financial foundation they'd struggle to live without.
In 2022, 22.7 million people were pulled above the federal poverty line by this critical program, including 16.5 million adults aged 65 and over, according to an analysis from the Center on Budget and Policy Priorities. If Social Security didn't exist, the senior poverty rate would be almost four times higher -- an estimated 38.7%, versus the current 10.2%.
Considering how many retirees lean on Social Security to help cover at least some portion of their expenses as they age, it should come as no surprise that the annual cost-of-living adjustment (COLA) reveal -- which is slated for 8:30 a.m. ET, on Oct. 10 -- is the most anticipated of all announcements.
While hopes are high for considerably beefier benefit checks in 2025, an unfortunate lose-lose scenario looks like it's taking shape , once again.
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What purpose does Social Security's COLA serve, and how is it calculated?
Social Security's cost-of-living adjustment is tasked with keeping benefits on par with the prevailing rate of inflation . As an example, if the price for a basket of goods and services that retirees regularly purchase rises by 3%, Social Security benefits should, in a perfect world, rise by the same percentage to ensure that retirees don't lose any purchasing power. The COLA is the near-annual increase to Social Security checks intended to keep pace with inflation.
It's certainly been a tale of two halves for Social Security's COLA since the program's inception . From January 1940, which is when the first retired-worker benefit was mailed, through 1974, COLAs were arbitrarily assigned by special sessions of Congress. Only 11 COLAs were passed along in this 35-year stretch, including none at all during the 1940s.
Beginning in 1975, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) became the inflationary tool used to determine COLAs on an annual basis. The great thing about the CPI-W is that all of its spending categories have individual percentage weightings. These weightings are what allow the index to be expressed as a single figure each month, which makes for quick and easy year-over-year comparisons to determine whether prices are collectively rising (inflation) or falling (deflation).
Calculating Social Security's annual COLA is a lot easier than you might think. Although trailing-12-month (TTM) CPI-W readings are reported each month, only the July through September (the third quarter) TTM readings factor into the COLA calculation. If the average CPI-W reading from the third quarter of the current year has increased from the comparable period in the previous year, inflation has occurred and Social Security checks will increase in the upcoming year.
The year-over-year percentage increase in average third-quarter CPI-W readings, rounded to the nearest tenth of a percent, determines the cost-of-living adjustment.
A sizable uptick in the prevailing rate of inflation has resulted in three consecutive years of above-average COLAs. U.S. Inflation Rate data by YCharts .
2025 cost-of-living adjustment estimates have substantially narrowed
For much of the past 20 years, Social Security's COLAs have been underwhelming. There were three years where deflation occurred and no COLA was administered (2010, 2011, and 2016), along with the smallest positive COLA in history (0.3% in 2017). All told, the average COLA on a trailing-20-year basis is a modest 2.6%.
However, the last three years have been outliers. A rapid increase in U.S. money supply during the COVID-19 pandemic sent the prevailing rate of inflation soaring to levels not witnessed since the early 1980s. The result was respective COLAs of 5.9% in 2022, 8.7% in 2023, and 3.2% in 2024. The 8.7% jump in 2023 was the largest in 41 years on a percentage basis and the highest in history with regard to a year-over-year nominal dollar increase.
Although estimates for Social Security's 2025 COLA began on opposite ends of the spectrum , they've narrowed substantially and are now, effectively, in agreement with what's to come.
When the year kicked off, nonpartisan senior advocacy group The Senior Citizens League (TSCL) was forecasting a menial 1.4% COLA for 2025. But following the July inflation report, TSCL's 2025 COLA estimate sat at 2.57%, which rounds up to 2.6%.
Independent Social Security and Medicare policy analyst Mary Johnson, who recently retired from TSCL, has been doling out COLA predictions for years. Johnson's 2025 COLA forecast began at a more robust 3.2% following the April inflation report but has since backed its way down to 2.6%, based on data in the July inflation report.
Based on the average Social Security check of $1,920.48 that was doled out to more than 51 million retired-worker beneficiaries in August, a 2.6% COLA would translate into a roughly $50 lift to monthly benefits in 2025 . Comparatively, the average worker with disabilities and average survivor beneficiary would be expected to see their respective monthly payouts climb by $40 and $39 next year.
Image source: Getty Images.
Even if history is made, a lose-lose storyline is likely to play out for retirees
If TSCL's and Johnson's forecasts were to prove accurate, it would actually represent a history-making moment. This would be the first time this century , or 28 years in total, since beneficiaries have enjoyed four consecutive years with COLAs of at least 2.6%. On a nominal-dollar basis, a beefier Social Security check would be welcomed by most retirees.
Unfortunately, a similar lose-lose storyline seems to be playing out that'll have seniors receiving the short end of the stick, once again. Even if history is made, there's an extremely high probability that retirees are going to see the buying power of their Social Security income decline.
Compared to working-age Americans, seniors spend a higher percentage of their monthly budgets on shelter and medical-care service costs. As of the July inflation report, the TTM rate of inflation for shelter and medical-care services was notably higher than 2.6%. With the CPI-W catering to the spending habits of "urban wage earners and clerical workers," the expenses that matter most to seniors aren't getting the proper weighting for the COLA calculation.
A study released by TSCL in July estimates that the buying power of Social Security income has fallen by 20% since 2010 . A 2.6% COLA in 2025 would likely perpetuate this loss of purchasing power.
In addition to a seemingly persistent loss of buying power, most retirees are going to be kissing some or all of their 2025 COLAs goodbye due to another big uptick in Medicare Part B premiums.
Medicare Part B is the segment of Medicare responsible for outpatient services. Most seniors aged 65 and above (65 is the qualifying age for Medicare) who are receiving a Social Security benefit have their Part B premiums automatically deducted from their monthly payouts.
In May, the Medicare Trustees Report estimated that Part B premiums would increase by 5.9% to $185 per month next year from $174.70 per month in 2024. This would mark the second straight year of a 5.9% increase in Part B premiums and will almost certainly limit the impact of the 2025 Social Security COLA for most beneficiaries.
Between a steady loss of purchasing power for Social Security income and rapidly rising Part B premiums gobbling up their COLAs, retirees can't catch a break.
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