In July, more than 51.2 million retirees received an average Social Security check of $1,919.40. This program, which took effect in August 1935 and paid out its first pension check in January 1940, is critical to the financial well-being of most aging Americans.

For 23 years in a row, the Gallup polling firm has surveyed retirees about their dependence on income from America’s main retirement program. Consistently, between 80 and 90 percent of retirees said they need their monthly payout to cover at least some of their expenses.

For retirees, nothing is more important or anticipated than the announcement of the annual cost-of-living adjustment (COLA), which is now less than seven weeks away (October 10, 2024). The exciting thing about Social Security’s 2025 COLA is that it is on track to achieve something no one has seen this century. At the same time, however, it could still cause disappointment for retirees.

What is the Social Security COLA and why is it important?

The Social Security cost-of-living adjustment is a mechanism by which benefits are adjusted almost annually to take account of changes in the prices of a large basket of goods and services.

Imagine if the price of the goods and services you regularly buy increased by 5% from one year to the next. You would also want your income to increase by 5% to ensure that you can still buy the same amount of goods and services. Social Security’s COLA is the tool that adjusts benefits for inflation to ensure that there is no loss of purchasing power.

Between the first mailed check for retirees in January 1940 and 1974, COLAs were completely arbitrary and passed by special sessions of Congress. After no COLAs for the entire 1940s, eleven adjustments were made from 1950 to 1974.

Starting in 1975, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) became the annual inflation index used to calculate the Social Security COLA. The CPI-W includes more than a half-dozen major spending categories and a long list of subcategories, each with its own percentage weighting. These specific weightings allow the CPI-W to be expressed as a single number at the end of each month, allowing for precise year-to-year comparisons to determine whether prices are rising (inflation) or falling (deflation).

Although the CPI-W is reported monthly, only the last 12 months, July through September, are used for the annual COLA calculation. If the average CPI-W value for the third quarter of the current year increased from the average CPI-W value for the comparable period of the previous year, the collective price of goods and services increased and beneficiaries must receive a cost-of-living adjustment in the coming year.

For those curious: The percentage difference in the average CPI-W values ​​for the third quarter (July to September) year-over-year, rounded to the nearest tenth of a percent, determines how much benefits increase in the following year (i.e. the COLA).

A significant increase in the inflation rate in the US has led to above-average COLAs for three years in a row. US inflation rate data from YCharts.

This would be a first this century for adjusting Social Security to the cost of living.

Since 2010, Social Security COLAs have been mostly paltry. There have been 10 years when COLAs have been 2% or less, including the lowest positive COLA in history (0.3% in 2017), and three years when no COLAs were passed due to deflation (2010, 2011, and 2016).

However, this trend has changed dramatically over the past three years. In 2022, 2023, and 2024, Social Security has implemented cost-of-living adjustments of 5.9%, 8.7%, and 3.2%, respectively, all well above the 2.6% average COLA over the past 20 years. The 8.7% benefit increase in 2023 was the largest in percentage terms in 41 years.

Following the release of the July inflation report, the nonpartisan seniors advocacy group The Senior Citizens League (TSCL) updated its Social Security COLA forecast for 2025 to 2.57%, which rounds up to 2.6%. This is more or less the same as its 2.63% prediction following the June inflation report and a mirror image of its 2025 COLA forecast of 2.57% following the May inflation report.

Meanwhile, independent Social Security and Medicare policy analyst Mary Johnson, who recently retired from TSCL, has lowered her 2025 COLA forecast for the third year in a row. Johnson’s prediction that Social Security’s 2025 COLA will be 2.6% is perfectly aligned with TSCL’s.

Although a 2.6% COLA would be the smallest percentage increase in Social Security benefits in four years, it would be the first time this century that we have seen a COLA of at least 2.6% for four years in a row. The last time that happened was 28 years ago.

For the more than 51 million retirees who receive Social Security benefits, a 2.6% COLA would mean an average monthly increase of about $50 next year.

By comparison, in 2025, average monthly payments for disabled workers and survivors are expected to increase by about $40 and $39, respectively.

Pensioners are disappointed

If Johnson and TSCL’s consistent projections of a 2.6% COLA for Social Security in 2025 prove accurate, it would be the fourth year in a row that COLAs meet or exceed the 20-year average. You might think this would be a good thing for retirees – but that couldn’t be further from the truth.

Although the CPI-W is designed to ensure that seniors’ purchasing power is maintained, it does a terrible job.

As the full name of this inflation tether suggests, it is an index that focuses on the spending habits of “urban wage earners and office workers.” Urban wage earners and office workers are predominantly working-age Americans who do not currently receive a check from Social Security. More importantly, they spend their money differently than retirees.

Seniors spend a higher percentage of their monthly budget on housing and healthcare than the average working American. However, the CPI-W does not place special emphasis on these two spending categories because it focuses on the spending habits of younger Americans in general.

Based on the last 12 months, the inflation rate for housing – housing is the largest weighted component in the CPI-W – and medical care is well above forecasts that predict a COLA of 2.6% for 2025. In other words, it points to another year of Social Security payments losing purchasing power.

To make matters worse, most beneficiaries can expect to see their COLA reduced or wiped out by a significant increase in premiums for Medicare Part B. This is the part of Medicare that covers outpatient services.

In May, the Medicare Trustees Report estimated that Part B premiums would rise 5.9%, to $185 per month, in 2025. If Part B premiums more than double Social Security’s COLA, the impact of that 2.6% benefit increase will be muted.

Even though this is the first time this century that this has happened, pensioners are once again in for a big disappointment.