Social Security retirees get bad news about the 2025 cost-of-living adjustment (COLA).
From 1975 Social security Consumers receive annual cost-of-living adjustments (COLAs) tied to a subset of the Consumer Price Index known as the CPI-W, which tracks the prices of goods and services in the economy.
Here’s how it works: The CPI-W from the third quarter of the current year (the average reading between July and September) is divided by the third quarter of the previous year. The percentage increase will be next year’s COLA.
Importantly, COLAs are designed to preserve Social Security’s purchasing power by ensuring that benefits increase at the same rate as inflation. For example, CPI-W inflation increased 2.5% last year, so Social Security payments increased 2.5% this year. It is the smallest COLA since 2021.
Unfortunately, Labor Department data published last week showed that CPI-W inflation has risen again over the past three months. That trend is bad news for retired workers on Social Security. Here’s why.
of Cost of living adjustment (COLA) applied to Social Security payments in any given year is based on CPI-W inflation as of the third quarter of the previous year. In this sense, COLAs are a way of compensating retirees for lost purchasing power benefits in the previous year.
That means retirees are always behind the curve to some extent, but as inflation rises, the problem is even worse. To put it differently, while any inflation reduces the purchasing power of benefits, Social Security loses purchasing power more quickly as inflation rises. It is still happening today.
Notably, after dropping to 2.2% in September 2024, CPI-W inflation rose 2.8% in October, November and December. This means that inflation has been higher every month since the COLA was calculated. One result is a 2.5% COLA in 2025 that undercuts full-year CPI-W inflation by 2.9% in 2024.
That means Social Security’s spending power has dropped by four-tenths of a percentage point, which is another way of saying the 2025 COLA wasn’t enough. If the shortfall was a one-time event, it would have little impact, but the same thing happened with the previous COLA. Notably, CPI-W inflation increased 3.8 percent in 2023, while benefits increased only 3.2 percent in 2024.
So, the cumulative COLA over the last two years should have been 6.8%, but benefits only increased 5.8%. For context, the average retired worker earned $1,905 per month in December 2023. The monthly payment will now be $2,034, with benefits increased by 6.8%, but that retiree will only receive $2,015 per month because benefits have only increased by 5.8%. The difference is a total of $228 for the entire year.
