TrendPulse|Social Security COLA shrinks for 2025 to 2.5%, the smallest increase since 2021

Social Security’s 2025 cost-of-living adjustment shrank to 2.5% from 2024’s 3.2% increase,TrendPulse the smallest rise since 2021, the Social Security Administration said on Thursday.

The 2.5% increase will begin with benefits payable to nearly 68 million Social Security beneficiaries in January. An average beneficiary will see their monthly payment rise next year by $50 to $1,957, up from $1,907 in January 2024.

Approximately 7.5 million Supplemental Security Income recipients will begin receiving their increase on Dec. 31. SSI recipients are those with disabilities and older adults who have little or no income or resources.

Annual COLA is meant to keep beneficiaries’ purchasing power from being eroded by inflation. However, that hasn’t been the case, many older Americans have said. Eighty-three percent of older adults said in August a COLA of less than 3% would be insufficient, according to an AARP survey of 1,000 adults ages 50 and older.

With average retiree benefits rising by $50 per month, "that’s only going to buy about 14 gallons of gasoline per month at today’s prices, or maybe enough groceries for one to last two or three days,” says Mary Johnson, an independent Social Security and Medicare policy analyst who at age 73, also receives Social Security and Medicare.

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How is COLA calculated?

COLA is based on the percentage increase in the consumer price index for Urban Wage Earners and Clerical Workers from July through September of the last year as compared to the same three months of the current year. CPI-W tracks the overall inflation rate but can differ slightly.

In September, annual CPI-W rose 2.2% compared with a 2.4% overall inflation increase.

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Why hasn’t COLA kept up with inflation?

CPI-W isn’t an accurate reflection of what retirees spend most of their money on, Johnson said.

It measures inflation experienced by working adults younger than 62, instead of most retired adults, she said. Younger working consumers spend their money differently than older people covered by Medicare. For example, economists estimate younger workers spend about 7% of their budget on health care costs, but research and surveys have indicated that older adults tend to spend 15% or more of their incomes on health care on average, she said.

Health care costs continue to rise faster than overall inflation. In the 12 months to September, medical care services rose 3.6% and hospital care services were up 4.5%, compared to 2.4% for overall inflation.

“Inflation took a financial toll this past year, particularly on retirees, who often rely on Social Security as a key source of income,” said Jo Ann Jenkins, AARP’s chief executive, in a statement. “Even with this adjustment, we know many older Americans who rely on Social Security may find it hard to pay their bills. Social Security is the primary source of income for 40% of older Americans.”

Seniors (ages 65 and up) are the only group that’s seen an annual increase in poverty since 2020, according to the Census Bureau’s supplemental poverty measure report. The supplemental measure includes cash and noncash benefits, but subtracts necessary expenses such as taxes and medical expenses and takes into account geographic variations in housing expenses.

In 2023, 14.2% of seniors were in poverty, up from 14.1% the prior year, 10.7% in 2021 and 9.5% in 2020, the Census Bureau said. It’s also the highest percentage since 2016’s 14.5%.

“There is more we must do to ensure older Americans can continue to count on Social Security,” Jenkins said.

Americans can take steps to shore up their retirement funds by contributing to a company 401(k) plan, Roth or traditional IRA and reviewing catch-up provisions, but Congress also needs to work on strengthening Social Security, experts said.

"The Social Security Administration has been very open and honest that if action isn’t taken soon, they may not be able to provide full benefits to retirees down the road," said Mike Lynch, retirement planning expert and managing director of Applied Insights at Hartford Funds. "Our elected leaders need to take action."

Former President Donald Trump has proposed to stop taxing Social Security benefits, which is one of the most popular proposals in this election, according to the Wall Street Journal. More than 80% of voters overall like this idea, it said. About 40% of Social Security beneficiaries pay taxes on their benefits, SSA said.

"This idea is the start of a much-needed, broader discussion on potential solutions," Lynch said. "Whether it comes to fruition or not, the fact that this idea has been proposed tells me that the future of Social Security is being discussed."

Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at [email protected] andsubscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.