When the Social Security Administration (SSA) announces the cost-of-living adjustment (COLA) that will affect their monthly payments, millions of Americans look forward to it every year. Since inflation gradually reduces purchasing power, this COLA is essential for the more than 70 million Social Security recipients who depend on these benefits for everyday needs.
Given the importance of Social Security, particularly for older adults, knowing the yearly COLA is essential for managing budgets and predicting changes in income. The COLA was set at 2.5% for 2025, which is a decent number but the lowest increase in four years.
Why COLA Matters
The foundation of retired Americans’ financial security is frequently Social Security income. Surveys conducted by Gallup since 2002 have shown that between 80% and 90% of seniors rely on Social Security to help them make ends meet. 88% of seniors stated in April 2024 that these benefits were critical to their financial security.
Their benefits would lose value due to inflation, and they would have less purchasing power annually if there was no annual adjustment. Effectively acting as a safeguard, COLA keeps Social Security benefits at their true value even as prices increase.
Calculate COLA
The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is used by the SSA to determine COLA. Only the CPI-W data from the third quarter (July, August, and September) is taken into account by the COLA each year. The average CPI-W figure for these months is compared by the SSA to the third-quarter average of the prior year. Social Security benefits grow by the same percentage in the event of an increase. For instance, recipients would receive a 3% COLA, rounded to the closest tenth of a per cent, if the CPI-W increased by 3% in Q3 of one year compared to the next.
Based on September’s CPI-W statistics, this year’s adjustment, which was finalised on October 10, leads to a 2.5% increase. It is nevertheless higher than the long-term average of 2.3%, although being modest when compared to recent years.
Historical Context
Benefits from Social Security were not always adjusted for inflation. Benefit amounts were fixed when it started in 1935 until Congress approved changes. When Congress enacted annual COLAs in 1975, this was altered, enabling benefits to automatically adjust to inflation. Since then, the SSA has made adjustments to payments using CPI-W data, which shows a significant improvement in protecting recipients’ purchasing power.
The last ten years have demonstrated a wide range of COLA changes. Beneficiaries saw very little growth in the 2010s; in 2010, 2011, and 2016, there was no COLA at all because of low inflation, and in 2017, the increase was a record-low 0.3%.
Larger changes were recently brought about by high inflation, nevertheless, with COLAs rising to 5.9% in 2022, 8.7% in 2023, and 3.2% in 2024. In reaction to the extraordinary economic climate, COLAs increased as a result of the COVID-19 epidemic, which caused inflation to reach record highs.
2025 COLA
The 2.5% increase, which is the lowest since 2021, nevertheless maintains beneficiaries’ spending power somewhat steady and offers some inflation respite. Given the growing costs of necessities, even a modest COLA can have a significant impact on retirees and those reliant on Social Security.
To keep up with inflation without reducing their actual purchasing power, the majority of recipients will see a little increase in their monthly income as a result of this modification. The 2025 COLA is still greater than the historical average, although falling short of the higher adjustments of prior years. This shows a consistent dedication to preserving benefits that are in line with the state of the economy.
