The Social Security Administration (SSA) adjusts benefits every year based on inflation through a process called the cost-of-living adjustment (COLA). This adjustment is meant to help retirees keep up with the rising costs of goods and services. However, there’s more to COLA than many retirees realize.
Here are five key facts seniors should know about COLA and Social Security before they retire:
1. How Social Security COLA is Calculated
COLA is based on the Consumer Price Index (CPI). Specifically, the SSA compares the CPI for Urban Wage Earners and Clerical Workers (CPI-W) during the third quarter (July, August, and September) of one year with the same period from the previous year.
For example, the COLA for 2025 was determined using CPI data from the third quarter of 2024 compared to the third quarter of 2023. This ensures that benefits reflect inflation trends.
2. COLA May Not Fully Cover Rising Living Costs
One critical thing to understand is that the CPI-W isn’t tailored to retirees. It measures inflation impacts on working Americans, not seniors.
There’s another index called the Consumer Price Index for Americans 62 and Older (CPI-E), which focuses on senior-related costs like healthcare. Studies suggest that if the SSA switched to CPI-E, COLA would increase by about 0.2% more annually. While this difference may seem small, it adds up over time, especially for retirees living on fixed incomes.
3. When COLA Actually Takes Effect
Technically, the COLA goes into effect every December, not January. But because Social Security payments are made a month in arrears, retirees first see the adjusted amount in January’s check.
For example, the COLA increase implemented in December 2024 is reflected in payments sent out in January 2025. To avoid confusion, people often refer to this as the “2025 COLA.”
4. 2025 COLA: The Lowest Increase in Four Years
Due to cooling inflation, the 2025 COLA saw a smaller increase compared to recent years. Here’s a breakdown of past COLA percentages for context:
| Year | COLA Percentage |
|---|---|
| 2020 | 1.3% |
| 2021 | 5.9% |
| 2022 | 8.7% |
| 2023 | 3.2% |
| 2024 | 2.5% |
The 2.5% COLA for 2025 is the smallest adjustment since inflation spiked a few years ago.
5. Most Seniors Are Dissatisfied with COLA
A recent survey by The Motley Fool found that 81% of retirees feel the 2025 COLA isn’t enough to cover essential living costs. Seniors often face higher expenses in areas like healthcare and housing, which have been rising faster than overall inflation:
- Healthcare costs: Up by 3.4% over the past year.
- Housing costs: Up by 4.6% as of December 2024.
Since seniors spend a larger portion of their income on these necessities, their expenses often outpace the COLA.
Is the Current COLA System Perfect?
No, the current system isn’t perfect. While it helps millions of retirees by adjusting for inflation, it doesn’t fully address the unique financial challenges seniors face.
There’s ongoing debate about whether the SSA should switch from CPI-W to CPI-E for calculating COLA. If adopted, CPI-E could increase yearly adjustments by 0.2% on average, significantly benefiting retirees over time. However, this change has yet to gain serious legislative traction.
Final Thoughts
Social Security’s COLA plays a crucial role in helping retirees manage rising costs, but it isn’t without its flaws. Understanding how it’s calculated, when it takes effect, and why it might not fully cover rising living expenses can help seniors better plan for retirement.
While there’s hope that future changes could make the system more effective for seniors, it’s important for retirees to explore additional sources of income to secure financial stability in their golden years.
Disclaimer – Our team has carefully fact-checked this article to make sure it’s accurate and free from any misinformation. We’re dedicated to keeping our content honest and reliable for our readers.
Himanshu Sharma writes for The Octant, focusing on recruitment, government schemes, and current affairs. He is dedicated to making complex information accessible to readers.
Himanshu enjoys playing chess, hiking, and trying new recipes, always seeking ways to combine his love for writing with his passion for exploration.