12 Crucial Things To Know About the Social Security COLA

Each year, the Social Security Administration reevaluates its monthly payment amounts and adjusts them to account for inflation. This annual change is called the Social Security cost-of-living adjustment, or COLA. 

If you’re a retiree on a fixed income who worries about managing your budget while avoiding throwing away money, the annual COLA can have major consequences for your bottom line.

Here's everything you need to know, from what the COLA is, how high 2025’s increase is, and much more.

Starting in the 1970s, the Social Security Administration (SSA) decided to adjust monthly Social Security benefit payments to account for the year’s cost-of-living increase.

This cost-of-living adjustment (COLA) applies to every Social Security recipient, so whether you're planning for retirement or already retired, your Social Security payment will change from year to year based on the COLA.

Before 1975, the Social Security cost-of-living adjustment was determined by Congress and happened only once in a while rather than once a year. After 1975, adjustments were left to the SSA and based on the Consumer Price Index.

The SSA determines the year’s COLA by looking at the Consumer Price Index (CPI), which is tracked by the Bureau of Labor Statistics and calculates how much the average price of standard services and goods changes month over month. 

Specifically, the COLA is based on the CPI-W, or the CPI for Urban Wage Earners and Clerical Workers.

The CPI-W is a narrower measurement than the more commonly used CPI-U, a broader measurement that considers price increases for urban consumers generally. 

In contrast to the CPI-U, the CPI-W focuses on price increases that impact hourly and clerical workers in areas like food and transportation. It doesn’t focus quite as much on health care or housing costs.

The COLA for 2024 was 3.2%, marking a more modest increase compared to recent years — Because inflation was so extreme in 2022, the COLA for 2023 was 8.7%, the most significant Social Security increase in four decades.

This increase meant that payments rose by an average of $59 per month. As a result, benefit totals reached an average of $1,927 per month for single individuals and $3,014 for married couples with spouses also eligible for Social Security.

The 2025 COLA increase for Social Security beneficiaries is 2.5%, the smallest in four years. Payments rose by an average of $50 per month. Monthly payments will average $1,976 for single individuals and $3,089 for married couples, where both spouses are eligible for benefits. The maximum amount of earnings subject to Social Security tax will rise to $176,100.

For those under full retirement age, the earnings limit is $23,400, with $1 deducted for every $2 earned above this limit. Individuals reaching full retirement age in 2025 will have an increased earnings limit of $62,160, with $1 deducted for every $3 earned over this threshold.

There is no earnings limit for individuals who are full retirement age or older for the entire year.

For what it’s worth, the 2023 COLA was an outlier (as was the intense level of inflation). Over the last 20 years, the average Social Security COLA was just 2.6%. 

So, while a 2.5% to 3% increase pales compared to 2023, it's still close to the average.

The Social Security Administration calculates the 2025 COLA in October 2024. The change will take effect in December 2024, and the increased amount will be reflected in the benefits payment you receive for January 2025.

There can only be a cost-of-living adjustment to Social Security payments if inflation causes a cost-of-living increase for the general American public.

While inflation tends to drive prices up year over year, this wasn’t true in 2010, 2011, or 2016. During those three years, Social Security payments stayed the same as the previous year.

Even if the CPI measures a decrease in the overall cost of goods and services for the year, your Social Security benefits won’t decrease. At the very least, your benefits will stay the same.

So don’t worry about receiving a decreased payment just because prices are dropping at your local grocery store.

Medicare Part B is the section of Medicare that helps retirees pay for routine doctor’s visits, outpatient services, at-home medical equipment (like wheelchairs), and preventive care (like vaccinations).

As with other insurance plans, Medicare Part B requires the insured individual to pay a monthly premium. And if you’re a retiree receiving Social Security benefits, that premium is typically deducted directly from your benefits check before it winds up in your bank account.

However, just like the general cost of living, Medicare Part B premiums tend to increase over time. This year's premiums are going up by 5.9%, which would lessen the impact of a potential 2.5% COLA increase.

Along with the projected Social Security COLA increase and Medicare Part B premium increase, many retirees should expect to see changes to the amount of money they spend on prescriptions — hopefully, a change entirely for the better.

The Inflation Reduction Act of 2022 included a provision limiting the amount of money Medicare Part D beneficiaries have to pay for medications out of pocket. 

By 2025, the law will impose a cap on out-of-pocket medication costs, which will hopefully help retired seniors keep more money in their wallets.

Living on a fixed income is often a challenge, even for seniors who might be doing better financially than others in their age group. 

That’s doubly true during unpredictable economic times, including over the last two years when inflation drastically reduced consumers’ spending power.

Unfortunately, while a 2.5% increase in Social Security benefits would be a welcome boost, it probably isn’t enough to compensate for still-high prices and the mountains of debt Americans took on to cope with inflation last year.

You can probably count on an increase in your Social Security payments starting this January, which will help boost your bank account.

But you shouldn’t count on receiving a bump as high as we saw in 2023 at any time soon. Hopefully, 2023's dramatic inflation was a one-time event, which means the 8% increase will not likely be seen again.