Despite some of the flaws of Social Security, I'm sure millions would agree that it's one of the most important social programs you'll find in the U.S. Are there some things that could be better about it? Sure. But there are also a lot of things Social Security gets right.
One thing retirees can appreciate about Social Security is the annual cost-of-living adjustment ( COLA ). A quick look at prices in your local grocery store or online will show how much costs have increased over the years. It's as clear as day. To help offset inflation that happens with time, Social Security has an annual COLA that increases monthly benefits for all Social Security retirement benefit recipients.
Social Security recently announced that the COLA for 2025 is 2.5%. Let's take a look at how it compares to past COLAs.
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How Social Security calculates the annual COLA
Before we discuss 2025's 2.5% COLA compared to recent years, it's worth noting how Social Security determines the annual COLA.
Social Security uses the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to determine the COLA. It's a monthly metric that tracks the prices of things like food and groceries, household items, transportation, and similar expenses.
The "Urban Wage Earners and Clerical Workers" portion of the metric means it reflects the spending habits of urban families whose primary income comes from hourly or clerical (office) jobs. According to the U.S. Department of Labor, this group represents about one-third of the population.
Social Security averages the CPI-W data for July, August, and September and compares it to the previous year's number. If the number is higher than the previous year's, the increase becomes the COLA. If the number is lower than the previous year's, Social Security doesn't reduce monthly benefits -- they remain the same.
For example, the average CPI-W for the third quarter of 2023 was 301.236. This year, it was 308.729. This 2.49% increase was rounded up to become the 2.5% COLA in 2025. If the CPI-W data were reversed and this year's was lower, there wouldn't be a COLA in 2025.
How does the 2025 COLA compare to previous years?
Since COLAs became automatic in 1975, the average COLA has been 3.75% if you include this year's COLA. At 2.5%, the 2025 COLA is below average and the lowest since the 1.3% COLA in 2021.
The good news: The 2025 COLA could be lower. The could-be-better news: The 2025 COLA could also be higher. That sounds obvious, but perspective is key.
Here are the five highest COLAs ever:
- 14.3% : 1980
- 11.2% : 1981
- 9.9% : 1979
- 8.7% : 2023
- 8% : 1975
Here are the five smallest COLAs ever:
- 0% : 2010, 2011, 2016
- 0.3% : 2017
- 1.3% : 1987, 1999, 2021
- 1.4% : 2023
- 1.5% : 2014
The 2025 COLA may not be anything to be jumping for joy over, but it does reflect cooling inflation over the past few years. A couple of years ago, inflation reached its highest mark in the past four decades, hence the high 8.7% COLA in 2023. I'm sure retirees appreciated the high increase, but many would have also preferred not to deal with record inflation at the time.
Ideally, Social Security is just one piece of the puzzle
Social Security keeps millions of Americans financially stable during their retirement years -- there's no denying it. For many of them, it's their only source of retirement income . Unfortunately, when that's the case, you're at the mercy of Social Security's COLA to help maintain your purchasing power.
Social Security hasn't necessarily been the best at that, however. According to The Senior Citizens League, retirees have lost 20% of their purchasing power since 2010. COLAs may help, but it's not always a 1:1 offset. That's why it's important to have multiple sources of retirement income. Whether it's a retirement account like a
401(k) or IRA or investments in a brokerage account, having multiple streams is the easiest way to solidify your financial stability in retirement and not be too reliant on Social Security.
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