Each year, millions of retirees and Social Security beneficiaries closely monitor updates on the annual cost-of-living adjustment (COLA), which helps ensure their benefits keep up with inflation. With economic conditions shifting and inflation easing, expectations for the 2025 COLA are notably different than in recent years. Here are three key facts to understand about Social Security COLA and what they might mean for beneficiaries in the coming year.
1. COLA Is Tied to the Consumer Price Index for Urban Wage Earners (CPI-W)
The Social Security Administration calculates COLA based on the third-quarter average of the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Specifically, the average CPI-W from July to September is compared to the same period in the prior year. If the index increases year over year, the difference translates into the COLA applied to benefits beginning in January of the following year.
2. Expectations for 2025 Indicate a Modest Increase
Following significant increases over the past two years due to high inflation—with COLAs of 5.9% in 2022, 8.7% in 2023, and 3.2% in 2024—analysts are predicting a more moderate adjustment for 2025. While the exact figure won’t be announced until October 2024, preliminary estimates suggest it could fall between 2% and 3%. This reflects a moderation in inflation and a gradual return to pre-pandemic cost trends.
3. COLA Impacts More Than Monthly Checks
A lower COLA affects retirees beyond simply their monthly benefit amount. It can influence budgeting decisions, eligibility for some financial assistance programs, and taxation on Social Security income. For example, higher COLAs in recent years pushed some seniors into higher tax brackets. Conversely, smaller COLAs can help avoid that push but may also result in benefits not keeping pace with actual living costs, especially in areas with higher-than-average inflation.
Understanding these fundamentals can help Social Security recipients set realistic expectations and better prepare for the changes ahead. As the next COLA is officially determined this fall, staying informed will be crucial to financial planning for the millions who rely on these monthly payments.
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