No event is more anticipated by the more than 68 million Social Security beneficiaries than the annual introduction of the cost of living adjustment (COLA). That’s because most retirees need a monthly Social Security check, in some capacity, to cover their expenses.
For more than two decades, Gallup has conducted an annual survey that measures retirees’ reliance on Social Security as a source of income. This year, for example, 88% of retirees listed it as a “main” or “minor” source of income, with only 11% responding that it was not necessary. In other words, most Americans would struggle without the financial foundation that Social Security provides.
In just 11 days — October 10 is the magic date to mark on your calendar — the 2025 Social Security COLA will open. With most estimates now agreeing on the size of this COLA, we can now estimate how much the average check will increase next year.
The Social Security COLA serves an important purpose
Before calculating how much Social Security benefits you will receive in 2025, it is important to understand the purpose of the cost-of-living adjustment.
In a utopian world, the prices we pay for goods and services won’t change, and beneficiaries won’t have to worry about Social Security income losing purchasing power. But in the real world, the price of almost everything we buy fluctuates over time, and often heads higher. Social Security’s COLA is mandated to ensure that beneficiaries do not lose purchasing power over time.
From the first employee pension checks sent in January 1940 to December 1974, there was no set system for determining COLA. However, arbitrary sessions of Congress pass COLAs from time to time. After no adjustment in the 1940s, a record-breaking 77% COLA was implemented in 1950.
Beginning in 1975, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) took its place as the inflation tool used to calculate the annual COLA. The CPI-W records price changes for more than 200 goods and services, each of which has its own percentage weight. These weights allow the CPI-W to be expressed as a single figure per month and make for easy month-to-month and year-to-year comparisons.
Although the CPI-W is reported monthly, only the 12-month reading during the third quarter (Q3), July through September, is factored into the Social Security COLA calculation. Simply put, if the average CPI-W reading in Q3 of the current year is higher than the comparable period last year, prices have risen in tandem (ie, inflation). If this happens, the benefit increases in the following year.
The magnitude of this increase is only the year-over-year percentage change in the average Q3 CPI-W reading, rounded to the nearest ten percent.
Here’s how much your Social Security check will be in 2025
Projections for Social Security’s 2025 cost-of-living adjustment begin at the lower end of the spectrum this year.
In January, the Senior Citizens League (TSCL), a Virginia-based nonpartisan senior advocacy group, estimated the 2025 Social Security COLA would be a disappointing 1.4%. But after several updates, TSCL now forecasts a cost of living adjustment of 2.5% for 2025.
On the other hand, Social Security and Medicare policy analyst Mary Johnson, who recently retired from TSCL, predicted a relatively strong 3.2% COLA after the April inflation report. However, this estimate has declined with each subsequent report and is currently at 2.5% corresponding to TSCL for 2025.
Despite nothing — the September inflation report is the final piece of the puzzle needed to definitively calculate Social Security’s 2025 COLA — both leading forecasters agree on a 2.5% COLA for next year.
But percentages only tell part of the story. Assuming that TSCL and Johnson’s predictions prove accurate, let’s take a closer look at the average Social Security check in 2025. For this exercise, I’ll use the average payment in August.
Based on data from the Social Security Administration, the average benefit for more than 68 million recipients in August was $1,783.55. A 2.5% COLA will cause the average check to increase by $44.59 per month next year.
But this increase can vary significantly, depending on type of heirs:
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The average retiree can expect their monthly check to increase by $48.01 to $1,968.49 with a 2.5% cost-of-living adjustment in 2025.
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For workers with disabilities, a 2.5% COLA would increase monthly benefits by an average of $38.50 per month to $1,578.42.
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Survivor beneficiaries should see an average monthly payment of $37.73 to $1,547.09 with a COLA of 2.5%.
Although this would represent the smallest COLA in percentage terms since 2021, it is still above the average 2.3% COLA achieved over the past 15 years.
Social Security COLAs don’t cut it for most retirees
Although beneficiaries are on track to receive another COLA (on paper) they deserve after nearly a decade of disappointment – no COLAs continued in 2010, 2011, and 2016 due to deflation, and the smallest positive COLA on record in 2017. (0.3 %) – the reality for the majority of retirees is that the Social Security COLA does not decrease compared to the inflationary pressures they are fighting against.
Based on data from the August inflation report, the cost of shelter services and medical care increased by 5.2% and 3.2%, respectively, during the last year. Both costs are important bearable more for seniors than the average working American, and rising at a faster rate than the 2025 COLA estimates.
With the CPI-W focusing on the spending habits of “urban wage earners and clerical workers,” who are often working-age Americans who do not currently receive Social Security benefits, the stage is set, more often than not, for Social Security benefits to lose purchasing power.
In mid-July, TSCL published an analysis that found the purchasing power of Social Security dollars has declined 20% since the beginning of 2010. Furthermore, the rate of inflation in a given year has exceeded the COLA mandated in the last 10. 15 years.
To make matters worse, Medicare Part B premiums are expected to increase again in 2025. Part B is the part of Medicare responsible for outpatient services.
According to the Medicare Trustees Report, Part B premiums are projected to increase 5.9% by 2025 to $185 per month, matching the 5.9% increase this year. The majority of retired workers age 65 and older (that is, the age eligible for Medicare enrollment) have their Part B premiums automatically deducted from their Social Security checks each month.
If Part B increases by more than twice the 2025 COLA rate, it’s likely that most retirees will see at least some cost-of-living adjustments denied.
yes alreadySocial Security benefits are set to climb in 2025, but the cost to retirees continues to be far greater than any reward.
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Social Security’s 2025 Cost of Living Adjustment (COLA) Estimates Are in Agreement – Here’s How Much Your Average Check Is Expected to Increase Next Year was originally published by The Motley Fool
