Last month, the Social Security Administration announced that beneficiaries will receive a 2.5% cost-of-living adjustment (COLA) in 2025. That revelation disappointed many Social Security recipients. In fact, a recent survey conducted by The Motley Fool found that 54% of retired workers believe the 2025 COLA is insufficient.
However, it may help Social Security recipients to know exactly how COLAs are calculated. Understanding the process can make the result more relatable. It may also help some retirees to consider the COLA in terms of dollars, rather than percentage points. In that context, some people will receive an above average increase in benefits next year.
Read on to learn more.
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Exactly how Social Security's cost-of-living adjustments (COLAs) are calculated
Social Security's annual cost-of-living adjustments (COLAs) protect the purchasing power of benefits from inflation, as measured by a subset of the Consumer Price Index known as the CPI-W. Here's how the process works:
- The Bureau of Labor Statistics reports monthly CPI-W readings, which reflect spending patters across eight major product groups.
- The Social Security Administration averages the monthly CPI-W readings from the third quarter (July through September).
- The third-quarter CPI-W from the current year is divided by the same figure from the prior year, and the percent increase becomes the COLA in the next year.
Here's the big picture: While the 2.5% COLA in 2025 is the smallest increase in Social Security benefits in four years -- 3.2% in 2024, 8.7% in 2023, and 5.9% in 2022 -- that means prices across the economy are increasing at their slowest pace in four years.
Better yet, CPI-W inflation is still decelerating. It fell to 2.4% in October, which was below the third-quarter average of 2.5%. If that continues, Social Security benefits will lose buying power less quickly next year, and some retired workers may find the COLA more sufficient than they originally anticipated.
Some retirees on Social Security will get an above average COLA in 2025
All retired workers on Social Security will receive the same 2.5% cost-of-living adjustment next year. But what that 2.5% benefit increase equals in actual dollars will vary from person to person based on the size of their current payment. For instance, the Social Security Administration estimates the average monthly benefit for retirees will increase from $1,927 to $1,976 after the 2025 COLA. That means the average retiree will get an additional $49 per month in benefits next year.
Based on the information, retired workers that currently get more than $1,927 per month from Social Security will also receive an above average cost-of-living adjustment next year as measured in absolute dollars. At the extreme, someone that currently receives the largest possible payout of $4,873 per month will get an extra $122 per month next year, such that their updated benefit equals $4,995 per month.
Retirees unhappy with the 2025 COLA should consider these sources of additional income
Admittedly, the two points I've discussed so far will not help anyone struggling to make ends meet. For retired workers in that situation, earning additional income is a smart way to supplement the relatively small cost-of-living adjustment coming in 2025.
Fortunately, interest rates are elevated, which makes high-yield savings accounts and certificates of deposit look attractive. Additionally, enthusiasm about artificial intelligence has driven the stock market higher at a rapid clip, and all three major U.S. market indexes are within two percentage points of their record highs. That makes the present a reasonable time to sell some stock.
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