Social Security COLA Set at 2.5% for 2025

With inflation slowing, annual benefit adjustment will be lowest in 4 years

Andy Markowitz,

AARP

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En español

Published October 10, 2024

an illustration of a calculator with accounting paper sticking out the back

Jon Krause

Social Security beneficiaries will get a 2.5 percent increase in their monthly payments next year, the Social Security Administration (SSA) announced Oct. 10.

The 2025 cost-of-living adjustment (COLA) is the lowest since 2021, reflecting a continued cooling of inflation following a surge in consumer prices during the COVID-19 pandemic.

The 2.5 percent COLA will bump up the estimated average Social Security retirement benefit by $49 a month, from approximately $1,927 to $1,976, starting in January, according to the SSA. The estimated average survivor benefit will rise from $1,788 to $1,832 and Social Security Disability Insurance (SSDI) from $1,542 to $1,580.

“Inflation is clearly top of mind, not just for retirees, but for Americans generally, and the annual COLA provided by Social Security is a critical feature of the system,” says Rob Williams, managing director of financial planning at Charles Schwab.

“Some may feel the increase for 2025 is low relative to the inflation they feel in their pocketbooks,” Williams says. “Still, it’s a welcome increase that builds on a 5.9 percent increase in payments in 2022, 8.7 percent in 2023 and 3.2 percent this year.”

COLA follows prices — with a delay

The COLA is determined by year-to-year changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which tracks price trends for a market basket of goods and services. The CPI-W is a subset of the overall Consumer Price Index, the federal government’s main gauge of inflation.

The 2025 adjustment represents the difference between the average CPI-W for July, August and September of 2024 and the average for those months in 2023. The U.S. Bureau of Labor Statistics reported Oct. 10 that the index rose at a 2.2 percent rate in September, following increases of 2.4 percent in August and 2.9 percent in July.

Because one year’s COLA reflects the prior year’s price trends, there can be a lag in how it affects retirees’ pocketbooks. 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, said in a statement. But even with the COLA, she added, “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.

In their 2024 annual report, Medicare’s trustees projected that the standard Part B premium paid by most Medicare beneficiaries — $174.80 a month this year — will rise to $185 a month in 2025. That would effectively reduce the Social Security COLA by $10.20 a month for most recipients.

The Centers for Medicare & Medicaid Services typically announce Part B premium prices in mid-October.

“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 adds. “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?

Social Security is almost entirely funded by a payroll tax of 12.4 percent on eligible wages, with employers and employees each paying 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 only be able to pay 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.”

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