Early Signs Point to a Smaller Social Security Increase for 2025

Each year, Social Security recipients look forward to a little bump in their monthly income. The Cost of Living Adjustment (COLA) is based on the preceding year's Consumer Price Index (CPI) and is typically announced in the fourth quarter. 

In 2022, Social Security recipients received the highest COLA since the early 1980s, 8.7%, owing to record-breaking inflation seen in the third quarter of 2021. In 2023, the COLA was a more modest 3.2% as inflation began to settle in the latter half of 2022.

Based on a few early indicators, some experts speculate that that number will be much lower for 2025. While inflation trends continue to slow, other factors may be involved in the low percentage forecast for the following year. Retirees may want to tighten up their finances now in anticipation of higher prices and a lower COLA.

In an analysis by the non-profit senior advocacy group The Senior Citizens League, the COLA for 2025 is expected to reach 1.75%. This figure is based on the Consumer Price Index (CPI) report for January, which found a pattern of slowing inflation but higher prices for consumer goods like groceries, insurance, and housing.

The Congressional Budget Office, however, expects a slightly higher increase at 2.5%. While the Budget Office utilizes a different report to determine this number, both groups agree that the total percentage may be lower than in previous years.

It's still too early to predict the exact increase, however. "My estimates change month to month based on the most recent CPI data," said Mary Johnson, a Social Security and Medicare policy analyst with The Senior Citizens League. "We still have eight months of data to come in, and a lot could change." While both groups agree the increase will be smaller, more data for the 2024 economic landscape is needed to solidify the number.

The COLA fluctuates from year to year, and its final determination is based on inflation levels, but this hasn't always been the case. Before 1975, federal lawmakers dictated the percentage increase each year.

While 1.75% seems low compared to adjustments over the last few years, it's not the lowest on record. There was no increase in 2009, 2010, and 2015.

The highest increase on record was 14.3% in 1980.

The COLA for 2025 is similar to those in 2012 and 2014 — 1.7%.

Since the economy constantly fluctuates, a low or stagnant COLA is one sign of healthy, robust economic growth.

Since 1983, adjustments have been based on the average CPI from the third quarter of the previous year through the third quarter of the current year, with an announcement generally coming in mid-October and the increase taking effect in the first quarter of the upcoming year.

The COLA for 2024 was based on data collected from October 2022 through the end of September 2023, was announced on Oct. 12, 2023, and took effect in January 2024.

Everyone who receives Social Security benefits is eligible for the COLA.

Early reports indicate that the 2025 COLA will be a marginal increase of 1.75%, but there isn't enough data yet for a clear confirmation. The announcement should come in October. If the CPI decreases, the COLA will remain stagnant or drop to zero, but it will never be negative.

Inflation, which is expected to trend downward throughout the remainder of 2024, is a primary component in determining the final COLA percentage.