Social Security recipients are bracing for a smaller cost-of-living adjustment (COLA) in 2025, following three years of higher-than-average increases. This change reflects recent inflation trends, as the COLA is based on inflation rates from July to September each year, with the finalized adjustment announced in October. July’s inflation hit 2.9%, while August dropped to an annualized 2.5%. This slowdown hints at a cooling inflation trend, yet the increase in costs for essentials like healthcare, groceries, and utilities remains a concern for many retirees.
Forecasted COLA for 2025 and Expected Impact on Benefits
The Senior Citizens League, along with the Committee for a Responsible Federal Budget, projects a COLA increase of around 2.5% for 2025. If this estimate holds, Social Security recipients would see an average benefit increase of $48 per month, bringing the typical monthly payment to approximately $1,966. This increase represents a return to a more moderate COLA adjustment after a recent period of high inflation, during which Social Security benefits rose by 18.8% over three years to help offset the sharp rise in living costs. While the recent moderation in COLA signals a slowing inflation rate, it doesn’t mean prices are decreasing—only that the rate of increase has slowed.
| Year | COLA Increase (%) | Average Monthly Benefit (Est.) |
|---|---|---|
| 2022 | 5.9 | $1,600 |
| 2023 | 8.7 | $1,775 |
| 2024 | 3.2 | $1,918 |
| 2025* | 2.5 | $1,966 |
*2025 COLA is an estimated figure based on current inflation trends.
Rising Costs and the Challenges of Fixed Incomes
Essential expenses like food, energy, and insurance have become a growing strain for many retirees living on fixed incomes. To cope, some have had to tap into savings earlier than anticipated or cut back on non-essential spending. A lower COLA, though signaling lower inflation, may still feel inadequate as retirees face increasing costs, particularly in categories where prices tend to rise faster than general inflation.
For example, retirees like Susan and John Gering from Brentwood, Tennessee, have already made changes to their lifestyle. The couple, retired since 2019, now opts for shorter, less expensive travel, cutting down on trips and reducing the frequency of their visits to sporting events. By choosing closer destinations like Florida over Hawaii and cutting back on dining out, they hope to maintain their savings as living costs rise.
Inflation’s Impact on Different Types of Retirement Income
The effect of inflation on retirees’ purchasing power varies based on income sources and asset allocation. According to the Federal Reserve Bank of St. Louis, between 2019 and 2022, retirees with median incomes saw inflation-adjusted income growth of 4.4%, while those in the top quartile saw a 6.6% rise, and those in the bottom quartile faced a 1.2% decline. Retirees who rely more on stocks have generally fared better, as U.S. equities delivered an annualized return of 9.6% after inflation from February 2020 to July 2024. In contrast, bonds and cash holdings have underperformed, with bonds seeing a 4.98% annualized loss and cash holdings a 2.2% annual loss after adjusting for inflation.
Retirees in lower income brackets often depend more heavily on bonds and pensions than stocks. Unlike Social Security, private pensions typically do not adjust for inflation, leaving retirees with fixed incomes that may not keep pace with rising costs. Public-sector pensions, while sometimes indexed to inflation, generally have caps of around 3%—which may not fully cover current cost increases.
Medicare Premiums and Social Security Benefits
Rising Medicare premiums present an additional challenge, as they reduce the real impact of any COLA increase. In 2025, Medicare Part B premiums, which cover outpatient services, are projected to rise from $174.70 to $185 per month. This increase will consume around 20% of the projected $48 monthly COLA increase, reducing the financial relief for many seniors. With healthcare costs generally outpacing inflation, the higher Medicare premium may affect retirees’ budgets more than anticipated.
Outlook for Social Security Recipients in 2025
A lower-than-expected COLA in 2025 will likely add to the financial pressures many retirees face, especially those heavily reliant on Social Security or pensions without inflation adjustments. On the upside, a slower inflation rate may help preserve the purchasing power of savings and investments, as costs stabilize. However, retirees dependent on fixed incomes may still need to carefully budget to manage rising expenses.
How is the Social Security COLA calculated?
The COLA is determined by changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) over the third quarter of each year. The average inflation over these months determines the adjustment for the following year.
Why is the 2025 COLA expected to be smaller?
The 2025 COLA is expected to be smaller because inflation has slowed compared to previous years, reducing the need for larger adjustments to Social Security benefits.
How will Medicare premium increases affect my Social Security benefits?
An increase in Medicare Part B premiums, which is automatically deducted from Social Security, reduces the net increase retirees receive from COLA adjustments.
