In June, more than 51 million retirees received an average Social Security check of $1,918.28, which is just over $23,000 on an annual basis. While Social Security benefits don’t make retirees rich, they have proven essential to helping our nation’s aging workforce cover expenses.

For the past 23 years, Gallup has surveyed seniors to gauge their reliance on America’s leading retirement program. Between 80% and 90% of retirees surveyed (88% in 2024) said they rely on their Social Security benefits in some way to make ends meet.

For retirees, nothing is more important than the annual announcement of the Social Security Cost of Living Adjustment (COLA) and the information about how much they will receive in the coming year.

Estimates suggest Social Security’s COLA could make history in 2025 And disappointing at the same time. Here are 10 things you need to know about this important upcoming announcement.

1. Social Security’s COLA takes into account the effects of inflation

Before we dive into the deeper discussion, it is important to understand the purpose of the Social Security COLA.

Simply put, a COLA is the mechanism the Social Security Administration (SSA) uses to account for the effects of inflation (rising prices). Its purpose is to ensure that the purchasing power of Social Security benefits does not decrease over time.

For example, if the total price of a basket of goods and services regularly purchased by senior citizens increases, social security benefits should ideally be increased by a corresponding percentage to ensure that pensioners can continue to afford these goods and services.

2. October 10th is the official unveiling date

The SSA will officially announce the 2025 COLA on Thursday, October 10, 2024, at 8:30 a.m. ET.

The reason the COLA is always released in the second week of October (which I’ll get to in a moment) is because the final piece of the puzzle needed to make this calculation is the September inflation report. The U.S. Bureau of Labor Statistics (BLS) typically releases inflation reports for the previous month between the 10th and 15th days of a given month.

3. For the COLA calculation, only the CPI-W values ​​of the last 12 months from the third quarter are used.

Since 1975, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) has served as the annual inflation indicator for America’s main pension program.

Although the CPI-W is reported monthly by the BLS, only the last 12 months of the third quarter (July through September) are used to calculate the COLA. If the average third-quarter CPI-W value is higher in the current year than in the comparable period the previous year, inflation has occurred and program recipients are entitled to a COLA in the coming year.

For those curious: The percentage difference in the average CPI-W values ​​for the third quarter compared to the previous year, rounded to the nearest tenth of a percent, corresponds to the COLA for the coming year.

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

4. COLA 2025 is a major challenge

Social Security COLAs have been largely forgettable over the past 15 years. During that period, 10 COLAs were 2% or less, including three years (2010, 2011, 2016) when deflation (falling prices) occurred and no cost-of-living adjustment was passed through.

The last three COLAs, however, have been impressive. For 2022, 2023, and 2024, beneficiaries enjoyed COLAs of 5.9%, 8.7%, and 3.2%, respectively, well above the 2.6% average over the past two decades. The 8.7% COLA passed through in 2023 was the largest percentage increase in Social Security checks since 1982.

5. Social Security’s 2025 COLA could do something no one has seen in about 30 years

According to projections from the June Inflation Report, Social Security’s COLA could make history in 2025.

The nonpartisan senior-focused advocacy group The Senior Citizens League (TSCL) expects a COLA of 2.63% for 2025, which would round down to 2.6%. Meanwhile, independent Social Security and Medicare policy analyst Mary Johnson, who recently retired from TSCL, projects a COLA of 2.7% for 2025.

If Johnson is right, this would be the first time in 32 years that four consecutive COLAs reached at least 2.7%. But even if TSCL’s forecast turns out to be more accurate, it has been 28 years since four consecutive COLAs were at 2.6% or more. Either way, it would be history.

6. The cost of accommodation is the wild card that decides whether history is made

Although the CPI-W has more than half a dozen major spending categories and countless subcategories, its most heavily weighted component, housing, is the wild card for Social Security’s COLA in 2025.

The steepest rate hike cycle in four decades sent mortgage rates soaring in 2023 and crippled the existing home sales market. Although mortgage rates have fallen since their October 2023 peak, it is not yet clear whether this is too little, too late to affect stubbornly high housing inflation. If the housing inflation rate stays above 5% over the past 12 months, there is a good chance we are witnessing COLA history.

7. This is how much the benefits for the average benefit recipient would increase

What pensioners really care about is what those percentages mean for them in dollars. Based on TSCL and Johnson’s estimates from the June inflation report, the average retiree can expect to see an increase of about $50 to $52 in their monthly payout next year.

By comparison, the average disabled worker and survivor beneficiaries would expect monthly benefit increases of about $40 to $42 and about $39 to $41, respectively, in 2025.

8. Benefit recipients have been losing purchasing power since 2000

Now comes the disappointing part: Social Security income has steadily lost purchasing power since the beginning of this century.

Last year, TSCL published a study that compared aggregate COLAs between January 2000 and February 2023 with the collective price changes observed for a basket of goods and services that seniors regularly purchased during the same period. While COLAs had increased benefits by 78% since the start of the century, the price of that basket of goods and services had increased by 141.4%!

A more recent report, released in July 2024, finds that Social Security benefits have lost 20% of their purchasing power since 2010. In other words, a COLA of 2.6% or 2.7% will not be enough for most retirees.

9. Medicare Part B is expected to consume a significant percentage of next year’s COLA

To make matters worse, the Medicare Trustees Report released in May predicted a 5.9% increase in Part B premiums next year, to $185 per month. Part B is the Medicare section that covers outpatient services.

For most seniors, the Part B premium is automatically deducted from their monthly Social Security check. With Part B premiums expected to rise by more than double the projected COLA percentage for 2025, there’s a good chance most seniors won’t feel the full impact of next year’s cost-of-living adjustment.

10. The CPI-W is flawed and there is no easy solution

Last but not least, you should know that Social Security’s inflation measurement is fundamentally flawed.

As its full name suggests, the CPI-W tracks the spending habits of “urban wage earners and office workers.” These are typically working-age Americans who are not currently receiving Social Security benefits, which is a problem considering that 86% of the program’s recipients are 62 and older.

Seniors and working-age Americans spend their money differently. Specifically, seniors spend a higher percentage of their budget on housing and healthcare than the typical working-age American. As a result, these important costs are not adequately accounted for in the CPI-W, resulting in a persistent loss of purchasing power.

Although MPs from both parties acknowledge this shortcoming of the CPI-W, a solution is still a long way off.