The annual Social Security cost-of-living adjustment , or COLA, is one of the most important details of the government program. The annual bump in benefits helps ensure that seniors can maintain their standard of living throughout retirement.
But the details of the annual COLA shouldn't be ignored. Understanding how the COLA works could help you make some very important financial decisions over the next few months, the next year, and possibly the better part of a decade. And with the importance of Social Security to many households' retirement budgets, it's worth knowing all the details about Social Security COLAs.
Here are three things all retirees need to know.
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1. How the government calculates the COLA
A basic understanding of how the government calculates the annual COLA can help you plan for both the next year and the entirety of your retirement.
The COLA is based on the average year-over-year increase in inflation during the third quarter. The inflation measure used by the Social Security Administration is the CPI-W, which measures the cost of a basket of goods and services used by urban wage earners and clerical workers.
The calculation is simple. The SSA takes the average CPI-W reading during the months of July, August, and September. It then compares that number to the average reading during those same months from the year prior. The increase becomes the next year's COLA.
The choice of using the CPI-W measurement is a bit controversial. Many advocates assert the SSA should change to using the CPI-E reading, which measures a basket of goods that reflects the typical spending of a person age 62 years or older. The reading may more accurately reflect the true changes in cost of living for retirees.
The Senior Citizen's League says the average retiree's Social Security check has lost 20% of its buying power since 2010, despite COLAs that have increase those checks by about 40%. That's because essentials like healthcare, food, and housing have all increased even faster than the CPI-W reading in that time. The CPI-E may put more weight toward those items, as they typically account for a larger portion of seniors' budgets.
2. When the annual COLA is announced
The Social Security Administration cannot calculate the next COLA until it's received all of the necessary CPI-W data points from the Bureau of Labor Statistics (BLS). There's about a two-week delay from the end of the month until the BLS is able to publish the numbers. That means the September CPI-W reading won't come out until mid-October. And that's when the SSA will announce the COLA.
The SSA will announce the 2025 Social Security COLA on Oct. 10. While the SSA publishes the COLA in October, it won't go into effect until December. The change is reflected in the payments received in January. So, if you check your Social Security account in December, you can see how much you'll receive each month next year.
3. The COLA applies whether you're collecting benefits or not
The cost-of-living adjustment isn't just for current Social Security recipients. Anyone age 62 or older can benefit from the COLA.
The Social Security Administration bases its benefits calculation on certain numbers locked in place the year you turn 62. That calculation will determine your primary insurance amount , or PIA. That's the amount you'll receive if you claim benefits the month you reach your full retirement age.
It's also worth pointing out any wages earned in your 60s or later won't receive an inflation adjustment when the SSA is calculating your benefit. But retirees will benefit from the COLA increasing their PIA starting after the year they first become eligible.
That can result in a substantial increase in benefits for those who wait to claim benefits all the way until age 70. Not only do they have delayed retirement credits adding to their monthly check, the COLA is also accruing during that time. So, you don't need to claim benefits as soon as possible in order to start benefiting from Social Security's annual COLA.
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