Social Security: What is COLA, how is it calculated, and how much could payments increase 2025?
So that Social Security benefits keep pace with inflation an annual adjustment is applied. What is COLA and how will it affect checks issued in 2025?
Living on a fixed budget can be challenging for retirees, especially when prices fluctuate. Rapidly rising inflation, such as during the brief COVID-19 recession, can significantly reduce purchasing power. To prevent Social Security beneficiaries, including retirees, survivors, and those with disabilities, from losing purchasing power, the Social Security Administration implements an annual Cost-of-living adjustment (COLA). This adjustment is applied at the beginning of each year to monthly benefit payments.
Social Security: What is COLA, and how is it calculated?
COLA is calculated based on the Consumer Price Index for Salaried Workers in Urban Areas and Clerical Workers (CPI-W). The calculation runs from the third quarter of the prior year to the third quarter of the current year. The result is the increase that will be applied to Social Security payments for the following year.
For example, the CPI-W for the third quarter of 2022 was 291.901, while that of 2023 was 301.235. Between one quarter and another, there was a difference of 3.2%, which is the increase that was applied to Social Security payments for 2024. The increase began being applied to benefits in January.
What will Social Security payments look like in 2025?
Due to higher-than-normal inflation levels in 2022 and 2023, the COLA increased more than expected. However, since inflation has fallen month after month, a smaller increase is forecast for next year.
According to the most recent estimate from The Senior Citizens League, one of the nation’s largest nonpartisan senior groups, the Social Security cost-of-living adjustment for 2024 could be 2.63%. This estimate is based on data from the consumer price index for June and was adjusted up from the 2.56% forecast released in May.
In early August, the Bureau of Labor Statistics will release the July Consumer Price Index report, which will provide greater clarity as to to how high the 2025 COLA will be. However, the official number will not be released until mid-October when the reports for all three months are available.