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Social Security’s 2025 Cost of Living Adjustment (COLA) Projections Match: Here’s How Much the Average Check Is Expected to Rise Next Year

Social Security’s 2025 Cost of Living Adjustment (COLA) Projections Match: Here’s How Much the Average Check Is Expected to Rise Next Year

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There is no event that more than 68 million Social Security beneficiaries look forward to more than the annual Cost of Living Adjustment (COLA) announcement. 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 on the extent to which retirees rely on Social Security as a source of income. For example, this year 88% of retirees noted that this represented a ‘major’ or ‘minor’ source of income, while only 11% responded that it was not necessary. In other words, most Americans would likely struggle without the financial foundation that Social Security provides.

In just 11 days — October 10 is the magic date to circle on your calendar — Social Security’s 2025 COLA will be unveiled. With multiple forecasts agreeing on the size of this COLA, we can now estimate how much the average check is expected to rise next year.

A smiling person holding a miscellaneous stack of blown-up banknotes.A smiling person holding a miscellaneous stack of blown-up banknotes.

Image source: Getty Images.

Social Security’s COLA serves an important purpose

Before we delve deeper into the question of how much Social Security benefits will increase in 2025, it is quite 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 beneficiaries would not 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, often going higher. Social Security’s COLA is tasked with ensuring that beneficiaries do not lose purchasing power over time.

From the first mailed check to retired employees in January 1940 through December 1974, there was no established system for awarding COLAs. Instead, random sessions of Congress passed COLAs from time to time. After no adjustments were made in the 1940s, a record 77% COLA was adopted in 1950.

Beginning in 1975, the Consumer Price Index for Urban Wage Earners and White-collar Workers (CPI-W) took its place as the inflationary tool used to calculate annual COLAs. The CPI-W takes into account the change in prices of more than 200 goods and services, each of which has its own percentage weightings. These weightings allow the CPI-W to be expressed in a single figure each month, making month-to-month and year-to-year comparisons easy.

Although the CPI-W is reported monthly, only the last twelve months’ figures during the third quarter (Q3), July through September, take into account Social Security’s COLA calculation. Simply put, if the average CPI-W value in the third quarter of the current year is higher than the comparable period last year, prices have collectively increased (i.e. inflation). When this happens, benefits increase the following year.

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

US inflation chartUS inflation chart

US inflation chart

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

Social Security’s 2025 cost-of-living adjustment projections started this year at opposite ends of the spectrum.

In January, the Senior Citizens League (TSCL), a Virginia-based nonpartisan advocacy group, estimated that Social Security’s 2025 COLA would be a disappointing 1.4%. But after numerous updates, TSCL now predicts a 2.5% cost of living adjustment for 2025.

On the other hand, independent policy analyst Mary Johnson, who recently retired from TSCL, forecast a relatively robust COLA of 3.2% after the April inflation report. However, this estimate has dropped with each subsequent report and is now at a TSCL matching rate of 2.5% for 2025.

While nothing is definitively set in stone—the September inflation report is the final piece of the puzzle needed to finally calculate Social Security’s 2025 COLA—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 correct, let’s take a closer look at how much the average Social Security benefit is expected to rise in 2025. For this exercise I will 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 result in the average check increasing by $44.59 per month next year.

But this increase can vary significantly depending on the type from beneficiary:

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

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

  • Survivors should see their average monthly payout increase by $37.73 to $1,547.09 with a 2.5% COLA.

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

A visibly concerned couple uses a calculator to analyze bills and financial statements on the table.A visibly concerned couple uses a calculator to analyze bills and financial statements on the table.

Image source: Getty Images.

Social Security COLAs are inadequate for most retirees

Although beneficiaries are on track to receive a decent (on paper) COLA again after almost a decade of disappointment, no COLAs were passed in 2010, 2011 and 2016 due to deflation, and the smallest positive COLA ever was administered in 2017 (0 .3%) — the reality for the majority of retirees is that Social Security COLAs don’t cut that, compared to the inflationary pressures they face.

Based on data from the August inflation report, housing and medical care costs increased 5.2% and 3.2%, respectively, over the past year. Both expenses are important considerable more for seniors than for the average working American, and they are rising significantly faster than the estimated 2025 COLA.

With the CPI-W targeting the spending habits of “urban wage earners and white-collar workers,” often working-age Americans who are not currently receiving 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 showing that the purchasing power of a Social Security dollar had fallen 20% since the beginning of 2010. Furthermore, the prevailing inflation rate for a given year has exceeded the assigned COLA in 10 of the last years. 15 years.

Making matters worse, Medicare’s Part B premium is expected to see another scorching increase in 2025. Part B is the division of Medicare responsible for outpatient services.

According to the Medicare Trustees Report, the Part B premium is expected to increase 5.9% to $185 per month in 2025, matching the 5.9% increase implemented this year. A majority of retired workers age 65 and older (i.e., the age of eligibility for Medicare enrollment) will have Part B premiums automatically deducted from their monthly Social Security check.

If Part B increases at more than twice the rate of the 2025 COLA, it is an absolute certainty that most retirees will see at least some of their cost-of-living adjustment wiped out.

YesSocial Security benefits will increase 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) Forecasts Agree — Here’s How Much the Average Check Is Expected to Rise Next Year Originally published by The Motley Fool