Why Should You Expect a Reduced Social Security COLA in 2025?

Inflation impacts nearly every household in America, but it poses an especially significant challenge for retirees who rely on fixed incomes. For this reason, many retirees closely monitor the annual cost-of-living adjustment (COLA) to their Social Security benefits.

In 2025, seniors may see a lower-than-expected COLA increase due to easing inflation, which could impact their financial stability. Here’s a detailed breakdown of why the 2025 COLA might be smaller and what it means for retirees.

What Is the Social Security COLA?

The Social Security COLA is an annual adjustment to benefits designed to help recipients keep pace with rising prices. It is calculated based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which measures price changes in a basket of goods and services that consumers commonly purchase. If prices rise, the COLA increases, boosting monthly Social Security payments to help beneficiaries maintain their purchasing power.

Why Is the 2025 COLA Expected to Be Lower?

The COLA for 2025 is projected to be around 2.6%, down from the 3.2% increase in 2024. According to the latest estimates, including predictions by The Kiplinger Letter, the decrease is a result of slowing inflation. Inflation has been a key driver for higher COLAs in recent years, including the 5.9% COLA in 2022 and 8.7% COLA in 2023, both driven by pandemic-induced inflation spikes. However, as inflationary pressures subside, the corresponding COLA decreases.

In July 2024, inflation dipped below 3% for the first time since 2021, and many experts expect this trend to continue into the fall. The Social Security Administration (SSA) calculates the COLA using inflation data from July to September, so the final rate for 2025 could still fluctuate. However, unless there is an unexpected inflation surge in the coming months, retirees should expect a COLA near the 2.6% mark​.

The Impact of a Lower COLA on Retirees

While a lower COLA might seem like good news for the broader economy (as it indicates lower inflation), it presents challenges for seniors, many of whom rely heavily on Social Security for their income.

Over 40% of retirees depend on Social Security for more than half of their monthly income, and for some, it provides as much as 90% of their income.

Rising Healthcare Costs

A critical issue is that a lower COLA doesn’t always reflect the specific cost increases that affect retirees, particularly healthcare expenses. For instance, Medicare Part B premiums, which cover outpatient services, are expected to increase by about 5.8% in 2025, potentially eating into any benefit increases from the COLA. In 2024, the standard Medicare Part B premium was $174.80 per month, and it’s projected to rise to $185 in 2025​.

Housing and Utility Costs

Even though the overall inflation rate is falling, many retirees still face high costs for housing, utilities, and prescription drugs. Property taxes and homeowner insurance premiums have continued to rise, further straining retirees’ finances​.

Prescription Drug Costs

While the Inflation Reduction Act includes provisions to cap out-of-pocket prescription drug costs at $2,000 starting in 2025, high drug prices continue to burden retirees. Although Medicare will begin negotiating prices for some high-cost medications, this is not expected to significantly reduce drug costs for most retirees until future years​.

How the COLA Is Calculated

The Social Security COLA is determined by comparing the average inflation in the third quarter (July to September) of the current year to the same period in the previous year. If inflation is lower, the COLA will be smaller. The SSA uses the CPI-W as its benchmark for calculating this adjustment.

Some advocates argue that the CPI-W doesn’t accurately reflect retirees’ expenses, particularly their higher spending on healthcare. Many are pushing for the COLA to be based on the Consumer Price Index for the Elderly (CPI-E), which would weigh medical and housing costs more heavily​.

What Retirees Can Do

While Social Security recipients have little control over the COLA, there are a few strategies that can help cushion the impact of lower benefit increases:

1. Health Savings Accounts (HSAs): If you’re not yet enrolled in Medicare, contributing to an HSA can help you prepare for future healthcare costs. Contributions are tax-deductible, the money grows tax-free, and you can use it to pay for qualified medical expenses without paying taxes on withdrawals​.
2. Medicare Planning: Retirees should review their Medicare plans annually to ensure they have the best coverage. With rising healthcare costs, choosing the right Medicare Part D prescription drug plan or Medicare Advantage plan can save money on premiums and out-of-pocket expenses.
3. Budget Adjustments: Retirees may need to adjust their budgets to account for rising costs in areas not fully covered by the COLA, such as housing and utilities.

COLA Increases Over Recent Years

Year	COLA Increase
2021	5.9%
2022	8.7%
2023	3.2%
2024	3.2%
2025*	2.6%

Conclusion

The projected Social Security COLA for 2025 is expected to be the smallest since 2021, reflecting the recent slowdown in inflation. While this might be good news for the overall economy, it poses challenges for retirees who face rising healthcare, housing, and utility costs. It’s essential for retirees to plan ahead, review their healthcare coverage, and budget for these potential shortfalls.

The COLA provides a critical adjustment, but it doesn’t always keep pace with the specific financial pressures retirees face, particularly in healthcare. Advocates are pushing for changes to the COLA calculation to better reflect these realities, but for now, retirees should prepare for a modest benefit increase in 2025.

FAQs

References

• Kiplinger’s Personal Finance (2024). Social Security COLA Projections for 2025.
• Money.com (2024). Social Security’s 2025 COLA: What to Expect