Social Security COLA Set at 2.5% for 2025

Because one year’s COLA reflects the prior year’s price trends, how it affects retirees’ pocketbooks can lag. For example, 2022’s 5.9 percent increase was outpaced by that year’s inflation, which reached 9 percent. That produced an 8.7 percent COLA for 2023, a year when inflation ebbed to 3.4 percent by December.

The 2025 COLA could still buttress beneficiaries’ buying power if the inflation rate continues to drop. However, the Federal Reserve’s Survey of Professional Forecasters is projecting that the main Consumer Price Index will hold steady at 2.4 percent through the first half of 2025.

“This adjustment means older Americans will receive needed relief to help better afford essential items from groceries to gas,” Jo Ann Jenkins, AARP’s chief executive officer who retired in early November, said in a statement. But even with the COLA, “we know many older Americans who rely on Social Security may find it hard to pay their bills. Social Security is the primary source of income for 40 percent of older Americans.”

Insurance, health care have impact

In some categories, such as health care, long-term care and home and auto insurance, costs have risen at a greater clip than inflation overall, putting a bite on those on a fixed income who rely on Social Security.

Home insurance premiums increased by more than 20 percent from 2021 to 2023, according to Insurify, an online insurance marketplace.

“It’s likely that premiums will continue to increase into 2025 as natural disasters grow more frequent and damaging,” says Betsy Stella, vice president of carrier management and operations at Insurify. “For many retirees, homeownership represented financial security, but rising home insurance is turning it into a substantial financial strain for some.”

COLA gains can also be offset in part by increases in premiums for Medicare Part B, which covers outpatient services such as doctor visits. For most Part B participants, premiums are deducted directly from their Social Security payments. The standard Part B premium will rise to $185 a month in 2025, up from $174.70 in 2024. That effectively reduces the Social Security COLA by $10.30 a month for most Medicare enrollees.

“It may not feel like the cost of living is only at a 2.5 percent inflation rate, but that is where we are now,” says Lisa Featherngill, national director of wealth planning for Comerica Wealth Management.

“It’s also important to think about the fact that Social Security has built in increases from the last three years,” she says. “We’re building on the compounding of those rates over time. It is factoring in where we’ve been, and the fact that some prices just haven’t gone down.”

Funding shortfall on the horizon?

A payroll tax of 12.4 percent on eligible wages almost entirely finances Social Security. Employers and employees each pay 6.2 percent. Self-employed people pay the full 12.4 percent.

The tax is applied to earnings up to a certain threshold, which will increase next year from $168,600 to $176,100. That revenue goes toward Social Security payments for current beneficiaries with any excess funneled into two trust funds — one for retirement and survivor benefits, the other for disability benefits.

The funds had combined cash reserves of nearly $2.8 trillion at the end of 2023. But in recent years outlays for benefits have exceeded incoming tax revenue.

That means the SSA has had to tap the trust fund reserves to fully cover scheduled benefits. In their most recent annual report, Social Security’s trustees project that the trust funds will run short by 2035 and the program will be able to pay only 83 percent of scheduled benefits unless Congress acts to stabilize the system’s finances.

“While this [cost-of-living] adjustment is important, there is more we must do to ensure older Americans can continue to count on Social Security,” Jenkins said. “AARP continues to call on Congress to take bipartisan action to strengthen Social Security and secure a long-term solution that Americans can rely on.”