For retirees, the annual cost-of-living adjustment (COLA) from Social Security is meant to offer some relief as inflation raises the prices of goods and services. Unfortunately, the 2025 COLA will be the smallest in years; and it’s not enough to fully protect against rising costs. Here’s what retirees need to know about the recent shift in COLA calculations, and how it affects you this February.
The COLA formula and its impact this month
Since 1975, Social Security benefits have been adjusted yearly based on inflation, specifically using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). This index tracks the prices of a range of goods and services like housing, food, and transportation, with a particular focus on the items purchased by retirees. The adjustment is designed to ensure that retirees’ benefits keep up with the rising cost of living.
The formula works by comparing the CPI-W for the third quarter of the current year (July through September) with the same period from the previous year. The percentage increase is then applied to Social Security benefits. In 2025, the CPI-W inflation rate from the third quarter of 2024 was 2.5%, so retirees began seeing their benefits rise by the same percentage which started in January. While this sounds like a positive adjustment, it masks a deeper issue that many retirees will soon feel.
Inflation reaccelerates and diminishes buying power
While a 2.5% increase may sound fair, it falls short in the face of rising inflation. Inflation has been accelerating again in recent months, with the CPI-W climbing from 2.2% in September to 2.8% in December. This increase in inflation is a problem because the COLA for 2025, based on the July-to-September data, was calculated before these upticks became evident. As a result, the COLA did not fully reflect the inflationary pressures of the latter part of 2024.
In practical terms, this means retirees will have less buying power than expected. This means that even with the COLA increase, expenses may seem higher than usual this February. While the COLA for 2025 is 2.5%, full-year CPI-W inflation for 2024 will likely be closer to 2.9%. This discrepancy represents a shortfall in the adjustment, leaving retirees with a net loss in purchasing power. In 2024, inflation was already rising faster than the COLA, and it appears that the 2025 adjustment won’t be enough to catch up.
A pattern of underestimating inflation
This issue is not a one-time event. A similar discrepancy occurred last year. In 2023, CPI-W inflation reached 3.8%, but Social Security payments only saw a 3.2% increase. Over the past two years, retirees should have received a cumulative 6.8% boost in their benefits to match inflation. Instead, they received only 5.8%. For an average retiree receiving $1,905 per month, this gap means they are missing out on an extra $228 annually.
Though inflation may slow in some years, the current upward trend is concerning, especially for retirees who rely on their Social Security checks to cover their living expenses. When inflation reaccelerates, as it has in recent months, the adjustments fall short of protecting retirees’ financial well-being.
The issue with COLA is compounded by the fact that Social Security adjustments are always reacting to inflation, not anticipating it. Retirees never quite catch up to the inflation rate, especially in years when inflation is high and accelerating. This leads to a gradual erosion of their buying power over time.
In 2025, as the cost of living continues to rise, retirees will need to look for additional ways to supplement their income to make ends meet. This may include tapping into savings, selling stocks, or finding other investment opportunities such as high-yield savings accounts and money market funds, which are paying attractive interest rates as of late. These strategies won’t eliminate the shortfall caused by insufficient COLAs, but they can help offset some of the financial strain.
