What you need to know about this year’s Social Security cost-of-living adjustment

NEW YORK (AP) — Tens of millions of older Americans will see a boost in their benefits in January when: new cost of living adjustment is added to social security benefits.

The 2.5% increase is intended to help meet higher prices for food, fuel and other goods and services. The average recipient will see an increase of about $50 per month, according to agency officials. Social Security recipients received a 3.2% increase in their benefits in 2024, and some retirees are concerned that this year’s increase won’t be big enough to meet their needs.

The Social Security Administration will notify recipients of their new benefit amount by mail starting in early December. Adjusted payments to nearly 7.5 million people receiving Supplemental Security Income will begin on December 31. Supplemental Security Income provides monthly payments to adults and children who have incomes below certain financial limits and are eligible for Social Security benefits.

Here you can read what you should take into account:

How does social security work?

About 72.5 million people, including retirees, disabled people and children, receive social security benefits.

The program is funded by taxes on income subject to Social Security payroll taxes. The government uses taxes from working people to pay benefits to people who have already retired, people who are disabled, the survivors of workers who have died, and dependents of beneficiaries. In 2025, Social Security payroll taxes will be levied on the first $176,100 of income, up from $168,600 this year

Although the money is used to pay people currently receiving benefits, any unused money goes into the Social Security trust fund. Some of the money in the trust, along with the Social Security contributions of people in the workforce, is paid for future benefits.

To determine the amount of Social Security benefits you will receive, the government calculates a percentage of your highest wages based on your 35 best earning years, taking into account when you choose to receive benefits.

How is the cost of living adjustment calculated?

The COLA is calculated based on the Bureau of Labor Statistics’ consumer price index, but there are calls to use a different index – one that measures price changes based on the spending habits of older people – such as healthcare costs, food and medicines.

The smaller increase for 2025 is because inflation is slowing. That means prices aren’t rising as quickly as they were at the height of the COVID pandemic. Recipients received a historically large 8.7% benefit increase in 2023 due to record high inflation.

Is the trust running out of money?

Future problems with the fund have long been predicted, largely due to demographic shifts. As the birth rate falls, fewer people become employees, resulting in fewer payroll tax payments. Meanwhile, more and more baby boomers are retiring and receiving Social Security.

The annual administrators of Social Security and Medicare report released in May The program’s trust fund will not be able to pay full benefits starting in 2035, according to the report. If the trust fund is depleted, the government will only be able to pay 83% of planned benefits.

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The Associated Press receives support from the Charles Schwab Foundation for educational and explanatory reporting to improve financial literacy. The independent foundation is separate from Charles Schwab and Co. Inc. The AP is solely responsible for its journalism.