Social Security’s cost of living adjustment (COLA) projections for 2025 agree – here’s how much the average check is expected to rise next year

No event is more anticipated by the more than 68 million Social Security beneficiaries than the annual release of the cost of living adjustment (COLA). That’s because most retirees need their monthly Social Security check in some capacity to cover their expenses.

For more than two decades, Gallup has conducted annual surveys to measure retirees’ reliance on Social Security as a source of income. This year, for example, 88% of retirees said it was a “major” or “minor” source of income, while only 11% responded that it was unnecessary. In other words, without the financial foundation that Social Security provides, most Americans would likely struggle.

In just 11 days—October 10 is the magic date you should mark on your calendar—Social Security’s 2025 COLA will be unveiled. Since several forecasts now agree on the size of this COLA, we can now estimate how much the average check is expected to increase next year.

The Social Security COLA serves an important purpose

Before we go into detail about how much Social Security benefits are expected to rise in 2025, it’s pretty important to understand what purpose the cost of living adjustment serves.

In a utopian world, the price we pay for goods and services would never change, and recipients wouldn’t have to worry about their Social Security income losing purchasing power. But in the real world, the price of almost everything we buy fluctuates over time and often increases. The Social Security COLA’s job is to ensure that recipients do not lose purchasing power over time.

From the first pension check mailed in January 1940 to December 1974, there was no set system for allocating COLAs. Rather, Congress passed arbitrary sessions of COLAs from time to time. After no adjustments were made in the 1940s, a record-breaking 77% COLA was introduced in 1950.

Beginning in 1975, the Consumer Price Index for Urban Wage Earners and Office Workers (CPI-W) was replaced as the inflation tool for calculating annual COLAs. The CPI-W takes into account the price change of more than 200 goods and services, each with its own percentage weighting. These weights allow the CPI-W to be expressed as a single number each month and allow for easy month-to-month and year-to-year comparisons.

Although the CPI-W is reported monthly, only the last twelve months of the third quarter (Q3) from July to September are included in Social Security’s COLA calculation. To put it simply: if the average CPI-W value in the third quarter of the current year is higher than in the comparable period last year, then overall prices have increased (i.e. inflation). In this case, the benefits increase in the following year.

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The magnitude of this increase is simply the year-over-year percent change in average CPI-W scores in the third quarter, rounded to the nearest tenth of a percent.

Here’s how much Social Security checks will increase in 2025

Projections for the 2025 Social Security cost of living adjustment started at opposite ends of the spectrum this year.

In January, the Senior Citizens League (TSCL), a nonpartisan senior advocacy group based in Virginia, estimated Social Security’s 2025 COLA at a disappointing 1.4%. But after numerous updates, TSCL now forecasts a 2.5% cost of living adjustment in 2025.

On the other hand, independent Social Security and Medicare policy analyst Mary Johnson, who recently resigned from TSCL, predicted a relatively robust COLA of 3.2% following the April inflation report. However, this estimate has fallen with each subsequent report and is now at a TSCL equivalent of 2.5% for 2025.

While nothing is set in stone — September’s inflation report is the final piece of the puzzle needed to finally calculate Social Security’s COLA for 2025 — both major forecasts agree on a 2.5% COLA for the coming 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 how much the average Social Security check is expected to increase in 2025. For this exercise, I’ll use the average payouts for the month of August.

Based on Social Security Administration data, the average benefit paid to the more than 68 million recipients in August was $1,783.55. A 2.5% COLA would cause the average check to increase by $44.59 per month over the next year.

However, this increase can vary significantly depending on the region type Beneficiary:

• The average retired beneficiary can expect their monthly check to increase by $48.01 to $1,968.49, with a 2.5% cost of living adjustment in 2025.

• For workers with disabilities, a 2.5% COLA would increase the average monthly benefit by $38.50 per month to $1,578.42.

• The average monthly survivor payout is expected to increase by $37.73 to $1,547.09 with a 2.5% COLA.

While this would be the lowest COLA in percentage terms since 2021, it is still above the average COLA of 2.3% passed over the last 15 years.

Social Security COLAs are not enough for most retirees

Although beneficiaries are on track to receive another decent (on paper) COLA after nearly a decade of disappointment, no COLAs were passed on in 2010, 2011, and 2016 due to deflation, and 2017 became the smallest positive COLA administered since records began (0.3%) – the reality for the majority of retirees is that Social Security COLAs are inadequate compared to the inflationary pressures they face.

Based on data from the August inflation report, housing and medical care costs rose 5.2% and 3.2%, respectively, last year. Both issues are important significant more for seniors than for the typical working American, and they are increasing significantly faster than the 2025 estimated COLA.

Because the CPI-W focuses on the spending habits of “urban wage earners and office workers,” who are often working-age Americans who are not currently receiving Social Security benefits, in most cases the stage is set for Social Security benefits to lose purchasing power.

In mid-July, TSCL released an analysis that found the purchasing power of a Social Security dollar has declined 20% since the start of 2010. Additionally, in 10 of the last 15 years, the prevailing inflation rate for a given year has exceeded the assigned COLA 15 years.

To make matters worse, Medicare’s Part B premium is expected to rise rapidly again in 2025. Part B is the arm of Medicare responsible for outpatient services.

According to the Medicare Trustees Report, the Part B premium is expected to rise 5.9% to $185 per month in 2025, which would match the 5.9% increase enacted this year. Most retirees age 65 and older (i.e., the eligibility age for Medicare enrollment) will have their Part B premiums automatically deducted from their monthly Social Security check.

If Part B increases by more than double the 2025 COLA, it is a real certainty that most retirees will wipe out at least some of their cost of living adjustment.

YesSocial Security benefits are expected to rise in 2025, but the cost to retirees remains far greater than any reward.

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Social Security’s 2025 Cost of Living Adjustment (COLA) Projections Match Up – Here’s How Much the Average Check Is Expected to Rise Next Year was originally published by The Motley Fool