For the vast majority of retirees, Social Security represents much more than a simple monthly check. It is a vital source of income that provides a financial foundation for aging Americans who can no longer support themselves.

For 23 years, Gallup has conducted annual surveys to determine the extent to which retirees rely on the income they receive from their income. Social security. Since 2002, between 80% and 90% of those surveyed, including 88% in April 2024, believe that their Social Security contribution is, to a certain extent, necessary to make ends meet.

These survey results show why the cost of living adjustment (COLA) revealed by the Social Security Administration (SSA) is the most anticipated announcement by beneficiaries year after year.

In the early morning hours of October 10, the SSA lifted the hood of the 2025 COLA, which offers a sort of good news/bad news scenario for social security beneficiaries in the coming year.

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What is the Social Security COLA and how does the SSA calculate it?

The Social Security “COLA,” which you’ve probably been hearing about incessantly for weeks, is the SSA’s tool for adjusting Social Security benefits to the effects of the crisis. inflation.

For example, let’s say the cost of purchasing a large basket of goods and services increases by 3%. If Social Security benefits do not increase, retirees will lose purchasing power to inflation (rising prices) over time. COLA is simply the “raise” given most years and designed to prevent beneficiaries from losing purchasing power.

For the first four decades of Social Security’s existence — when it was enacted between 1935 and 1974 — there was no reason or reason to adjust benefits. Following the first retired worker’s check sent by mail in January 1940, he it took a little over a decade before the first COLA was adopted by a special session of Congress.

Beginning in 1975, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) was used to measure price changes. This was a big step forward for America’s main retirement program, as it allowed for annual cost-of-living adjustments.

Although the CPI-W is published monthly, only the 12-month figures ending in the third quarter (July, August and September) are taken into account in the calculation of the Social Security COLA. If the average CPI-W figure in the third quarter of the current year is higher than in the same period of the previous year, social security checks are expected to increase.

The amount of the increase passed to beneficiaries equals the year-over-year percentage difference in the third-quarter average CPI-W readings, rounded to the nearest tenth of a percent.

A dramatic increase in the U.S. money supply during the COVID-19 pandemic has led to four consecutive years of above-average COLAs. Inflation rate in the United States data by Y Charts.

Here’s What Social Security’s 2025 COLA Means for Your Monthly Benefit

Throughout the 2010s, beneficiaries didn’t have much to look forward to. This decade was the only three years of deflation in the last half century that resulted in no COLA transfers (2010, 2011, and 2016), as well as the smallest positive COLA on record (0.3% in 2017).

However, the trend has changed significantly in recent years. The COVID-19 pandemic has led to largest year-over-year increase in US money supplywhich has pushed the current inflation rate to its highest level in four decades. After a decade of mostly anemic COLAs, beneficiaries enjoyed increases of 5.9% in 2022, 8.7% in 2023, and 3.2% in 2024. The cost-of-living adjustment of 8.7% marked the largest percentage increase since 1982.

On October 10, following the release of the final piece of the puzzle needed to calculate Social Security’s 2025 COLA (the September inflation report), the SSA announced that beneficiaries would see their monthly checks increase by 2. 5% over the coming year.

Although this is the smallest benefit increase in the past four years, it still represents an above-average boost. The average cost of living adjustment since 2010 has been a more modest 2.3%.

But it’s one thing to talk about percentages and an entirely different matter when looking at what the 2025 COLA actually means for your benefit.

The lion’s share of Social Security beneficiaries are retirees. The SSA estimates that the average retired worker beneficiary will earn about $1,927 per month by the end of 2024. But when the 2.5% COLA takes effect in the new year, the a typical retired worker will see their monthly payment increase by $49 to $1,976or about $588 more per year.

Disabled workers and surviving beneficiaries will also receive a 2.5% increase in their monthly checks. For the average disabled worker, their Social Security benefits are expected to increase by $38 per month, from $1,542 at the end of 2024 to $1,580 at the start of the new year.

Meanwhile, the average Social Security check for survivors of deceased workers is also expected to increase by $38 per month, from $1,513 at the end of 2024 to an estimated $1,551 in 2025.

Image source: Getty Images.

Bad news: significant costs will offset all or part of your 2025 COLA

But as previously noted, Social Security’s 2025 COLA is mixed. Although this is a fourth consecutive year with an above-average increase, compared to the previous 15 years of COLA, a majority of retirees will not fully benefit from the effects of next year’s adjustment.

One of the biggest problems for retirees is how this fourth consecutive year of above-average increase has been achieved. Even though the current inflation rate has declined recently, the biggest costs for older people are high.

Compared to the average working-age American, older adults spend a higher percentage of their monthly budget on housing costs and medical care services. Based on the September inflation report, the subsequent 12-month price increase for housing (the highest-weighted component of the CPI-W) and medical care services, according to the price index consumption rate for all urban consumers (CPI-U), which is an inflationary index similar to the CPI-W, was 4.9% and 3.6%, respectively. As long as these critical retiree costs increase at a faster rate than the 2025 COLA, most retirees are at risk of losing purchasing power.

Not surprisingly, a study released in July by the nonpartisan senior advocacy group The Senior Citizens League found that the The purchasing power of a Social Security dollar has decreased by 20% since 2010 for seniors.

Additionally, the Medicare Part B premium is expected to increase 5.9% to $185 per month next year. Part B is the segment of Medicare responsible for outpatient services, and this premium is generally deducted from the monthly check of Social Security beneficiaries age 65 and older (i.e., the age of eligibility for s enroll in Medicare).

If this Part B premium estimate proves accurate, it would more than double the 2025 COLA and partially or fully offset the increase retired workers are expected to receive in the new year.

Even though a 2.5% cost of living adjustment is only expected in two months, it is many beneficiaries are unlikely to feel the full effect of this increase.