There are less than six weeks left before retirees get a raise. Last month, the Social Security Administration announced that the next Cost of Living Adjustment (COLA) will be 2.5%. The adjustment takes effect on January 1, 2025.

But retirees should not count on this full amount. Here’s why the average Social Security increase will be about 20% lower than you might expect.

Image source: Getty Images.

Average social security benefits of retirees in 2025

Each October, the Social Security Administration determines the annual COLA for all Social Security beneficiaries. The agency has performed this ritual every year since 1975, when automatic Social Security COLAs began.

The COLA is calculated by comparing the average Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) for the third quarter of the current year to the average CPI-W for the third quarter of the previous year. The Social Security adjustment is the percentage increase (if any) in the measure, rounded to the nearest 0.1 percent.

When the Social Security Administration announced the 2025 COLA, it said average retirement benefits would increase by “about $50 per month” next year. In October, the average monthly Social Security benefit for retirees was $1,924.35. A 2.5% increase would translate to an additional $48.11 per month.

Why take-home equity will be lower for most retirees

However, most retirees won’t actually see an additional $48.11 (or $50) hit their bank account each month thanks to Social Security’s 2025 COLA. Don’t worry, though. The Social Security Administration is not going to deprive anyone of their well-deserved raise. There is a benign reason for the lower takeaway amount.

Medicare Part B premiums are automatically deducted from monthly Social Security benefits for anyone enrolled in both Social Security and Medicare Part B – and Part B premiums increase in 2025.

On November 8, the Centers for Medicare and Medicaid Services (CMS) announced premiums, deductibles and coinsurance amounts for all Medicare programs for 2025. The standard Medicare Part B premium will increase by $10.30 per month to $185.

Therefore, the average net increase after the COLA goes into effect will be about $37.81, just over 20% less than they might have expected after seeing the ad. from the Social Security Administration’s COLA last month.

Of course, we are only talking about averages here. Retirees with Social Security benefits well above average will not experience as large a percentage of the higher Medicare Part B premiums. In contrast, retirees with Social Security benefits significantly below average will feel the impact more . Also note: High-income beneficiaries pay higher premiums for Medicare Part B and will see their premiums increase more next year.

Some good and not so good news

There is also other news for retirees, good and not so good. While the average year-over-year CPI-W increase for the third quarter was 2.5%, the CPI-W increased 2.4% year-over-year. another in October. This slight improvement was better than the increase in “headline” inflation of 2.6%.

The bad news, however, is that prices in some categories that hit retirees hardest are rising faster than overall inflation. In particular, medical care services increased by 3.8% year-on-year.

Inflation could continue to fall in the new year. But it could also intensify again. Regardless, Social Security’s 2025 COLA likely won’t extend as far as many retirees would like.