Social Security COLA 2025: Retirees Should Be Prepared for Bad News and More Bad News | The Motley Fool

Next month, the Social Security Administration (SSA) will be announcing the latest cost-of-living adjustment (COLA) for 2025. Beneficiaries have been receiving COLAs for decades, with the first adjustment taking effect in 1975.

But with inflation soaring in recent years, they’ve been more important than ever. Millions of older adults rely heavily on Social Security, and every extra dollar counts.

In 2024, Social Security recipients received a 3.2% adjustment. The average retired worker benefit lands at roughly $1,900 per month, so that amounts to a raise of just over $60 per month. Unfortunately, retirees can expect some not-so-good news about the short- and long-term future of Social Security.

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Social Security’s 2025 COLA: A prediction

The COLA is based on third-quarter inflation data — specifically, changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The SSA takes an average of the CPI-W’s values for the months of July, August, and September. From there, that average is compared to the average from the year prior. If the current year’s average is higher, the percentage difference between the two will be the next year’s COLA.

The Bureau of Labor Statistics will release September’s CPI-W information in early October, and the SSA is expected to announce the COLA based on that data later in the month. Until then, we won’t know exactly what the adjustment will look like.

However, some experts are already making predictions, based on inflation data so far this year. Analysts at advocacy group The Senior Citizens League, for example, estimated in mid-September that the 2025 COLA will be 2.5%.

That’s lower than this year’s adjustment of 3.2% and less than the organization’s previous forecasts of 2.57% in August and 2.63% in July. For those expecting a larger raise next year, you may end up disappointed.

The bigger problem plaguing Social Security

In an ideal world, a smaller COLA should be a good thing. Because the COLA is tied directly to shifts in costs, a smaller adjustment from year to year should signal that inflation is slowing down. Slower inflation will likely have a bigger impact on retirees’ finances than the COLA, so smaller adjustments should be cause for celebration.

It doesn’t always work out that way, though, and retirees are often hit hard. Most seniors are living on a fixed income, with many surviving solely on Social Security. It’s critical, then, that benefits are able to at least keep up with inflation.

However, the CPI-W isn’t designed with older adults’ spending in mind. This particular index tracks costs relating to wage earners, which can often be quite different than expenses faced by retirees. Seniors tend to allocate more of their budgets toward costs like housing and basic necessities, for example, which have surged astronomically, compared to many other expenses.

A long-term issue that could hurt your finances

Seniors often are hit harder than the general population by rising costs, yet the COLA isn’t designed to reflect that. Even larger-than-average COLAs sometimes aren’t enough to keep up.

Since 2010 alone, Social Security has lost a whopping 20% of its buying power, according to a 2024 study from The Senior Citizens League. In other words, despite annual COLAs, benefits are actually worth far less now than they were a decade or two ago.

Furthermore, this trend seems to be worsening in recent years. During the last 15 years, there were eight in which the inflation rate outpaced the COLA for that year. But of the last five years, there’s only been one year when the COLA has managed to surpass the inflation rate — and that was in 2023, which had the highest COLA in four decades at a whopping 8.7%.

What does this mean for your retirement?

The COLA is a lifeline for many older adults, and any raise in benefits can be helpful. But it’s still important to keep your expectations in check, and if you can, now is the time to see if you can reduce your dependence on Social Security.

If you’re still working in any capacity, beefing up your savings can make it easier to avoid relying too heavily on your benefits. Or perhaps you can find a source of passive income to earn more without going back to work.

At the very least, it pays to be mindful about your spending and how much you’re pulling from your savings. If Social Security is a less reliable source of income in the future, you’ll want as many other income sources as possible to better protect your retirement.