Social Security COLA 2025: How Much Will Payments Increase Next Year?

How is the COLA calculated?

The CPI-W is a measure of price changes for a selection of goods and services, including food, energy and medical care, that is reported monthly by the BLS. It is a subset of the Consumer Price Index (CPI), which tracks a broader range of retail prices and is considered the “headline” number in measuring inflation. (The main index increased 2.5 percent year over year in August, down from 2.9 percent in July.) 

To calculate the COLA, the SSA compares the average CPI-W for the third quarter of each year to the figure for that same period the year before.

In 2023, the CPI-W rose 2.6 percent in July compared to the prior year, 3.4 percent in August and 3.6 percent in September. Over the full quarter, the index was 3.2 percent higher on average than for the same period in 2022, resulting in the COLA that took effect in January 2024.

While a 2.5 percent COLA would be the lowest since 2021, it would be more in line with the pre-pandemic period of relatively flat inflation. From 2001 through 2020, the COLA averaged about 2.2 percent. If there is no inflation, there’s no COLA — that happened in 2009, 2010 and 2015. The biggest adjustment ever was 14.3 percent in 1980.

Does the COLA keep pace with inflation?

Social Security benefits can lag behind inflation during short-term periods of price volatility, depending on whether the CPI is trending up or down, but “over the cycle, it really does protect people,” says Munnell, who has studied the issue.

For example, beneficiaries lost buying power in 2021, when the 1.3 percent COLA — based on low inflation in 2020 — was outpaced by surging consumer prices. That pattern repeated in 2022, when benefits increased by 5.9 percent but inflation reached a 9 percent peak. However, beneficiaries effectively caught up over the last two years as the inflation rate fell.

“The COLA precisely matches national inflation data, meaning it will fully offset the price increases Americans have seen since the last COLA,” says Emerson Sprick, associate director of economic policy at the Bipartisan Policy Center, a Washington, D.C.–based think tank. “Beneficiaries will receive only a moderate adjustment [in 2025] because they have enjoyed relatively stable price levels this year — a welcome change from the past few years.”

Prices for some major items, including rent and grocery staples such as meat and eggs, are rising faster than inflation overall, according to the BLS report. That can create problems for older adults, says Lynch.

“A low COLA may not be able to keep up and enable beneficiaries to do all the thing they choose to do in retirement,” he says. “A lower COLA reminds us of the importance of diversification and working with a financial professional to help manage Social Security and other sources of income efficiently. Beneficiaries should focus on what they can control, including other sources of income.”

Do Medicare costs affect the COLA?

Medicare costs can also affect the COLA’s value as a hedge against inflation. An increase in Medicare Part B premiums in 2025 would offset a portion of the cost-of-living increase for Social Security recipients who have premiums deducted directly from their benefit payments, as do most Medicare enrollees.

In their 2024 annual report, issued in May, Medicare’s trustees estimated the standard Part B premium paid by most enrollees would increase from the current $174.70 a month to $185 next year, effectively lessening the COLA increase by $10.30 a month for affected Social Security recipients. But that figure is preliminary; the actual premium is typically announced in the fall.

Social Security’s trustees, in their annual report this year, projected that absent congressional action to shore up the program’s long-term funding shortfall, benefits could be reduced by 17 percent by 2035. Sprick says that issue should remain top of mind even as beneficiaries anticipate an inflation adjustment.

“I think we can sometimes overemphasize COLAs,” he says. “They are certainly important, but by far the biggest threat to older Americans’ financial well-being is the program’s [projected] financial shortfall.”