Social Security’s 2025 Cost-of-Living Adjustment (COLA) Comes With Bad News and Worse News for Retirees

Many retired workers are struggling with rising prices. Gallup reports that a record number of Americans cited inflation as a source of financial hardship in 2024, and a recent survey from the Employee Benefit Research Institute found that over half of retirees worry they will need to make substantial spending cuts to keep up with inflation.

Consequently, Social Security’s 2025 cost-of-living adjustment (COLA) has become a focal point for many seniors. Last week, the Social Security Administration (SSA) announced that benefits will increase 2.5% next year. But that pay bump comes with bad news and worse news for retirees and other Social Security recipients.

The bad news: Social Security benefits will receive a below-average COLA in 2025

Inflation has fallen from the four-decade high it reached in 2022, but the price increases that scorched the economy following the pandemic are still a source of hardship for many retired workers. Consider these statistics from the Schroders 2024 U.S. Retirement Survey:

• Fewer than 50% of retired workers believe they have enough money saved.
• Almost 50% of Americans report higher-than-expected expenses in retirement.
• Nearly 90% of retired workers worry inflation will reduce the value of their savings.

“Whether it’s a trip to the gas station, grocery store, or pharmacy, prices in the U.S. have increased noticeably in recent years, and that is particularly challenging for retirees living on fixed income sources,” said Deb Boyden, Head of U.S. Defined Contributions at Schroders.

Retirees in financial distress will likely be disappointed by the 2.5% cost-of-living adjustment (COLA) coming to Social Security benefits in 2025. That pay increase pales in comparison to raises received in recent history: 5.9% in 2022, 8.7% in 2023, and 3.2% in 2024. Additionally, the 2025 COLA will fall below the 10-year average of 2.8%. If larger benefit increases in previous years left retirees in a difficult financial position, then a below-average COLA next year is unlikely to solve the problem. That’s bad news.

The worse news: Social Security benefits will lose buying power for the second straight year

The Senior Citizens League, a nonprofit advocacy group, estimates benefits have lost 20% of their purchasing power since 2010 because COLAs have consistently fallen short. The reason for that alleged shortfall is that Social Security’s COLAs are tied to a subset of the Consumer Price Index known as the CPI-W.

To elaborate, the CPI-W tracks inflation based on the spending habits of young, working-age individuals. But those people typically spend money differently than retired workers on Social Security. As a result, the CPI-W underemphasizes the importance of housing and healthcare costs, and it overemphasizes the importance of education and transportation expenses.

Consequently, many experts believe COLAs should be tied to the CPI-E, a subset of the Consumer Price Index that measures inflation based on the purchase patterns of people ages 62 and older. The CPI-E population aligns more closely with the Social Security population, meaning the underlying spending categories are weighted more appropriately.

The chart below compares Social Security’s actual COLA based on CPI-W inflation to the hypothetical COLA based on CPI-E inflation over the last two years.

Data source: Bureau of Labor Statistics.

As shown above, Social Security benefits would have increased more substantially in 2024 and 2025 had COLAs been tied to CPI-E inflation rather than CPI-W inflation. That means benefits have arguably lost buying power for two straight years. Specifically, provided CPI-E inflation is the more accurate measure, the buying power of Social Security fell eight-tenths of a percentage point in 2024 and will decline by another half-percentage point in 2025.

For context, the average retiree will receive an extra $49 per month from Social Security after the 2025 COLA, which equates to $588 in annual income. But the average retired worker would have received an extra $58 per month had the 2025 COLA been tied to CPI-E inflation, which equates to $696 in annual income.

On the bright side, we are not talking about enormous sums of money. And with interest rates still elevated, retired workers could potentially boost their income by putting money into certificates of deposit (CDs) or high-yield savings accounts. Alternatively, with the stock market near its record high, selling stock would be a reasonable decision right now.