It seems like not too long ago you could walk into a grocery store with $100 and almost fill a cart. These days, if you walk into a grocery store with $100, you might be able to fill a shopping cart.

For the most part, prices have steadily increased over time, and it’s not limited to groceries. You could fill out a notebook listing items that are more expensive than in previous years. And it all comes down to one thing: inflation.

Inflation affects everyone, but it is especially noticeable for those with fixed sources of income like Social security. The good (but could be better) news, however, is that Social Security has a system in place to try to put an end to this problem.

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How Social Security is coping with rising prices

To help offset rising prices, Social Security provides an annual cost of living adjustment (COLA) that goes into effect at the beginning of each year. The Social Security Administration uses the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) – a monthly measure that tracks inflation in common employee expenses – to determine the COLA for the coming year.

It takes CPI-W data from July, August and September (Q3), calculates the average, then compares it to the previous year’s figure. The percentage increase in the CPI-W corresponds to the COLA amount.

For example, the CPI-W average for the third quarter of 2023 was 301.236. In the third quarter of 2024, the average was 308,729. It is with this increase of approximately 2.49% that we obtained the COLA of 2.5% for 2025.

In the event that a year’s CPI-W data is the same or lower than the previous year’s data, there will be no COLA and the monthly benefits will remain the same. There will not be a situation in which Social Security reduces monthly benefits due to a decline in the CPI-W.

How the New COLA May Affect Your Retirement Plan in 2025

The most direct and obvious effect of the new COLA is the increase in monthly benefits. If your monthly Social Security benefit is $1,000 this year, it will be $1,025 starting in January 2025. If it is $2,000 now, it will be $2,050.

This part is simple. The less straightforward aspect is that Social Security recipients should plan less purchasing power next year.

Ideally, the annual COLA would completely cancel out inflation, but unfortunately this is not the case. According to senior advocacy group The Senior Citizens League, the purchasing power of Social Security recipients has declined 20 percent since 2010. That means $100 in 2010 would only get you about $80 worth of stuff today. ‘today.

A 2.5% increase is better than no increase, but it likely won’t be enough to keep up with the rising costs retirees face. The CPI-W is a fairly broad measure that doesn’t necessarily focus on expenses typically more relevant to retirees, such as medical care and health services. The PwC Health Research Institute predicts that medical costs will increase by about 7.5% for people with individual insurance. This is much less than the 2025 COLA.

How the 2025 COLA Compares to Previous Years

The 2.5% COLA is certainly modest, but history shows it could be worse. Below are the last 10 COLAs before 2025:

Source: Social Security Administration. Table by author.

To give some perspective, the average COLA since 1975 is 3.75%. The highest COLA ever recorded was 14.3% in 1980. In 2010, 2011 and 2016 there were no COLAs.

While I’m sure retirees like a high COLA because it means more money, it also means inflation was high, so the grass isn’t always greener.

Take the example of 2023, where the COLA was 8.7%. A huge boost is nice, but inflation in 2022 was also the highest in four decades. Make your choice.

Many things are beyond your control, including inflation. The best thing you can do is keep your retirement finances flowing and be willing to adjust some expenses to protect your long-term financial security.

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