4 Things All Retirees Need to Know About Social Security COLAs
These yearly increases may not be big enough, nor dished out soon enough.
On the off chance you’re receiving Social Security retirement benefits but haven’t yet heard, beginning in January your monthly payments are going to be a little bit bigger. Last month, the Social Security Administration announced a 2.5% cost-of-living adjustment (or COLA) for 2025’s payouts. That’s not bad. It’s not as big as 2024’s 3.2% improvement, but at least inflation has been cooling off of late.
Still, the recent news raises a handful of questions among the retirees it impacts the most. Here are a few things you might want to know about these annual cost-of-living adjustments.
1. It’s based on last year’s consumer inflation rate
The annual COLA isn’t a number arbitrarily decided by the Social Security Administration. Rather, it’s based on the previous year’s growth of the United States’ Consumer Price Index; you know this change better as “the inflation rate.”
The Consumer Price Index — or CPI — is the total cost of a basket of goods and services that’s regularly priced by the Bureau of Labor Statistics. Specifically, Social Security’s yearly cost-of-living adjustment reflects the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W. Although these increases are never enormous, they are fair in the sense that they at least don’t lose ground to inflation. (Just keep this detail in mind for a moment.)
2. These adjustments take shape after the fact
Although Social Security’s annual adjustment is mathematically fair, the procedure still arguably leaves retirees at a disadvantage. That is, by the time recipients begin receiving their bigger payments, they’ve been paying higher prices for everything for up to as much as a year.
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Most of the time this doesn’t matter much. Prices were an average of 2.5% higher for the better part of the past year, but Social Security recipients saw a 3.2% bump at the beginning of 2024.
In unusual years like 2022, however, retirees were paying on the order of 8.7% more for a range of goods and services for months before finally getting that amount of benefit increase at the beginning of 2023. For those who live paycheck to paycheck, it would have been a very tight, stressful year.
3. Not everyone’s adjustment will be the same dollar amount
While all recipients will see the same 2.5% improvement in the size of their current payments, that doesn’t mean everyone will see the same increase in terms of actual, total dollars.
It’s a purely mathematical matter. A 2.5% increase of relatively small monthly checks of $1,000 would beef these payments up to $1,025, a $25 increase. At the other end of the spectrum, a $4,000 check now would be inflated by $100 per month to $4,100.
Given that the average monthly Social Security check is $1,927, the average recipient should see something on the order of an additional $48 per month.
4. COLAs may or may not actually keep up with inflation
Last but not least, you need to know that these yearly COLA increases don’t necessarily offset the full impact of inflation.
Remember how the annual cost-of-living adjustments are based on changes of the CPI-W? This measure is based on costs that are somewhat unique to these employed individuals. A more accurate measure of retirees’ actual living costs, however, is the Consumer Price Index for Americans 62 years of age and older, or CPI-E. Unsurprisingly, it more accurately reflects the higher healthcare costs that elderly individuals often incur that younger people generally don’t.
To be fair, the CPI-E’s change more or less matches the CPI-W’s change in any given year. The small, cumulative differences can add up over time, however. Number-crunching done by The Senior Citizens League suggests that since 2010 the average Social Security payment now has about 20% less buying than it should.