The 2025 Social Security Cost of Living Adjustment (COLA) is almost official and could provide a surprising benefit for many retirees

The Social Security Administration will announce the Social Security Cost of Living Adjustment for 2025, or COLA, on October 10, and it could disappoint many retirees.

Over the past three years, seniors have become accustomed to super-sized pay increases. The COLAs for 2022, 2023 and 2024 were 5.9%, 8.7% and 3.2%, respectively. But retirees could be eligible for a pay increase of just 2.5% in 2025, as things stand now.

For many retirees, however, there is a surprising benefit to a lower COLA, and it could mean that many seniors are better off with a smaller monthly benefit.

How the government calculates Social Security COLA

The annual Social Security cost-of-living adjustment is intended to help Social Security benefits keep pace with inflation. The Social Security Administration uses a subset of the consumer price index known as the CPI-W, which measures the cost of a basket of goods and services representative of the typical expenses of an urban wage earner or office worker.

Specifically, the SSA measures the increase in the CPI-W during the third quarter of the year compared to the previous year. That increase becomes the COLA for the following year. So the 2025 COLA will be official when the SSA receives the September CPI-W value on October 10.

Many argue that the CPI-W is not representative of the spending of most seniors. That means COLA doesn’t keep pace with how much retirees spend on goods and services each year. In fact, the Bureau of Labor Statistics has created a new CPI subset called CPI-E, which measures the cost of a basket of goods that tracks the spending patterns of Americans age 62 and older. These are the households that the Social Security COLA directly affects.

Some have argued that switching from the COLA to the CPI-E or another measure more representative of the actual costs faced by retirees will help many retiree households maintain their living standards. The Senior Citizens League says the average Social Security recipient who started receiving benefits in 2010 has seen their purchasing power drop by 20% since receiving their first check.

But the fact that COLAs are based on an inflation measure, even if it is demonstrably the wrong one, means that a smaller COLA could surprisingly be a good thing for many retirees.

The Surprising Benefit of a Small Social Security COLA

Many retirees are not fully dependent on Social Security to finance their retirement budget. They saved and invested in their IRAs, 401(k)s and taxable brokerage accounts.

According to the Federal Reserve’s most recent Survey of Consumer Finances, the average household with someone age 62 or older who saved and invested during their career had $200,000 invested in retirement and investment accounts by the end of 2022. Based on stock market returns since then, these balances have likely increased significantly.

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These investments do not receive any cost of living adjustment. They are subject to the whims of the market. All things being equal, these investment accounts will have greater purchasing power when inflation is low. Meanwhile, Social Security’s COLA is lower when inflation is low, but is theoretically supposed to maintain its purchasing power.

Retirees with significant retirement savings may be much better off with a lower COLA in 2025. You will even have more purchasing power in the future if the COLA remains low.

Even if you rely heavily on Social Security, slow and steady inflation has historically been better for the overall purchasing power of those monthly checks than higher inflation. The Senior Citizens League found that Social Security’s purchasing power increased in most years since 2010 when the COLA fell below 3%. Since the Fed continues to target 2% annual inflation, a 2.5% increase next year should still result in an increase in purchasing power.

So while many may be disappointed by the SSA’s October 10 announcement, seniors should find it easier to afford things in 2025 if they look at the full picture and their total retirement savings and income.

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The Social Security Cost of Living Adjustment (COLA) for 2025 is almost official and could provide a surprising benefit for many retirees. Originally published by The Motley Fool