What is Social Security’s COLA and how can it affect your retirement plan in 2025?

Every year, tens of millions of retirees collect Social security Benefits are eagerly awaited for the next COLA, or cost of living adjustment. COLA is a pivotal part of the Social Security program that reflects the increase in Social Security benefits in the coming year. For example, if the COLA is 5%, most retirees will see a 5% increase in benefits next year.

The budget law aims to preserve the purchasing power of interest against inflation, which has been significantly higher in recent years. Let’s dive deeper into how COLA is calculated, what it will be in 2025, and how it could impact your retirement plan.

The following year’s COLA is not set until October of the current year. Because COLAs are intended to hedge against inflation, the Social Security Administration (SSA) uses inflation data to determine COLAs.

While the market focuses on the Consumer Price Index for All Urban Consumers (CPI-U) to measure inflation, the SSA looks to the Consumer Price Index for Urban Wage and Clerical Workers (CPI-W). Both the Consumer Price Index (CPI-U) and the Consumer Price Index (CPI-W) are published monthly. Specifically, the SSA uses CPI-W data in the third quarter of the year, which are the months of July, August, and September. Each month’s Consumer Price Index (CPI-W) is compared to the previous year’s figure. The SSA then takes the average of the percentage differences for each of the three months to arrive at the COLA for the following year.

In October, SSA 2025 Cola announced It would be 2.5%, representing the smallest COLA in four years, though it also means consumer prices are rising at a slower pace, causing the cost of living to fall over time. In November, the average monthly benefit check for retirees was about $1,925, or $23,100 annually. A 2.5% hike would increase the average benefit check to approximately $1,975, or $23,700 per year.

Getting a better idea of ​​your future finances can help you budget better and make better financial decisions. Some retirees rely on Social Security to provide most of their income, while others use it to supplement their retirement plans or other income.

Regardless, the nonpartisan Senior Citizens League (SCL) conducts an annual study that consistently shows that Social Security benefits are not keeping up with inflation. In a study this year, SCL found that Social Security beneficiaries have lost about 20% of their purchasing power since 2010. So, if retirees can find ways to grow their savings safely and efficiently, they may want to consider it.

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