Retirees Face Smaller Social Security Increases in 2025

In just weeks, retirees will receive their first Social Security benefits with the 2025 cost-of-living adjustment (COLA). This increase will bring the average monthly check to $1,976. Although this is a raise, it’s less than many had hoped for after three years of significant increases, including an 8.7% spike in 2023.

Critics argue that the upcoming 2.5% adjustment will fall short in covering rising expenses for seniors in 2025. An unusual aspect of how Social Security benefits are calculated may negatively impact many, resulting in an estimated loss of $120 for the average retiree next year, with some experiencing even larger shortfalls.

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Understanding How COLA Is Calculated

The Social Security Administration (SSA) typically issues COLAs to help benefits keep pace with inflation. This inflation is measured using the changes in the third-quarter averages of the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from one year to the next.

To determine the COLA, the government averages CPI-W numbers for July, August, and September of the current year, then compares this average to the previous year’s figures. In 2024, the average was 2.5% higher than in 2023, resulting in a 2.5% COLA for 2025.

However, it is important to note that the CPI-W reflects the spending habits of households in urban areas with at least one employed member. Retirees without jobs are not included in this calculation.

Why Retirees Might Be Shortchanged

Many advocate for using the Consumer Price Index for the Elderly (CPI-E) instead of the CPI-W for calculating COLAs, as the CPI-E more accurately represents the spending habits of individuals aged 62 and older. A study by The Senior Citizens League (TSCL), a nonpartisan senior organization, found that using the CPI-E would have led to higher COLAs in 7 out of 10 years from 2014 to 2024. If this method had been adopted, retirees would have gained an additional $2,689 over the decade.

In 2025, if the CPI-E were used for COLA calculations, seniors would receive a 3% increase instead of the planned 2.5%. This change would raise the average monthly benefit by an extra $10, amounting to $120 more for the year—nearly covering the projected increase in the Medicare Part B premium that deducts directly from Social Security checks.

Prospects for Change in COLA Calculation

Currently, there are no plans to switch from the CPI-W to the CPI-E for COLA calculations, despite some congressional support for such a change. If shifts do occur, they may be tied to larger reforms aimed at addressing Social Security’s potential funding issues.

Until then, retirees may need to rely on their savings or other income sources to make up for the deficiencies in their Social Security benefits. Additionally, checking eligibility for other government assistance, like Supplemental Security Income (SSI), could provide further financial support.

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