The Social Security Administration (SSA) is set to announce its cost-of-living adjustment (COLA) for 2025, and the new increase is expected to be smaller than in recent years. Analysts predict that the adjustment will be around 2.5%, which would make it the smallest raise for Social Security beneficiaries in four years. This change comes amid cooling inflation rates, and while all beneficiaries will see their payments increase by the same percentage, retirees aged 70 are likely to receive the most substantial nominal-dollar increases.
The COLA is designed to protect the buying power of Social Security recipients by ensuring that benefits rise in line with inflation. Over the past few years, inflation has significantly impacted many retirees, with 63% of U.S. adults reporting that rising prices have caused financial hardship, according to a Gallup survey conducted in 2024. With the latest COLA adjustment, the SSA aims to address these concerns, albeit with a more modest increase compared to the 8.7% spike in 2023.
For retirees, the expected 2.5% increase translates to an average additional monthly payment of about $48, based on the average Social Security benefit of $1,920 as of September 2024. However, retirees aged 70 will see a more significant bump in their payments. This age group typically receives higher benefits because they have delayed claiming Social Security, allowing their payments to grow due to the SSA's incentive structure. For instance, if the average benefit for a 70-year-old retiree is $2,068, they would receive an additional $51.70 per month in 2025.
The Senior Citizens League, a nonprofit advocacy group, estimates the 2.5% adjustment will fall short of what many seniors need to cope with rising costs. "Ensuring that seniors have enough to feed and house themselves with dignity is a major reason why we advocate for a minimum COLA of 3%," said Shannon Benton, the executive director of the group. Benton emphasized that two-thirds of seniors rely on Social Security for more than half of their income, and 28% depend on it entirely.
The calculation of Social Security benefits involves multiple factors, including lifetime earnings, the age at which benefits are claimed, and annual COLA adjustments. Benefits are determined based on the primary insurance amount (PIA), calculated from a person's highest 35 years of earnings. If individuals delay claiming Social Security past their full retirement age, their benefits increase. However, this incentive stops after age 70, making it the age at which retirees typically see the highest monthly benefits.
Historically, Social Security benefits tend to increase faster for new retirees due to wage growth outpacing inflation. But once individuals reach age 70, this dynamic shifts, and the inflation rate becomes the primary driver of benefit increases. This phenomenon is why 70-year-old retirees are expected to get the largest nominal-dollar COLA increases in 2025.
The SSA has been adjusting benefits annually since 1975, using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) as a benchmark for inflation. The August 2024 CPI report showed a 2.5% rise in average prices from the previous year, reflecting a more moderate inflation rate than during the peak of the COVID-19 pandemic. This figure serves as a basis for the 2025 COLA prediction, aligning with analysts' forecasts.
Despite these adjustments, some retirees remain concerned about the adequacy of their benefits in the face of rising living costs. "The proposed 2.5% increase is simply not enough to cover the growing expenses many seniors face," said Benton. "The rising costs of healthcare, housing, and basic needs continue to outpace the growth of Social Security benefits." Her organization continues to push for a higher COLA to better support seniors who rely heavily on these payments.
Another aspect of the COLA announcement involves changes to the earnings threshold for Social Security credits. To qualify for retirement benefits, individuals must accumulate 40 credits over their lifetime, with a maximum of four credits per year. In 2024, earning the full four credits required at least $6,920 in income, a figure that is expected to rise in 2025, alongside the updated COLA.
Additionally, the income cap subject to Social Security taxes could increase from its current level of $168,600, further influencing how much high-earning individuals contribute to the system. Any official changes to this cap and the credit threshold will be announced in conjunction with the new COLA rate on October 10.
