Every year the Bureau of Labor Statistics calculates the cost of living adjustment (COLA), determining how much the Social Security benefits will increase. For this reason, understanding more about this annual increase is essential for more than 70 million beneficiaries who rely on these benefits to cover their daily living expenses. For the past 23 years, Gallup has conducted annual surveys to establish seniors’ dependence on Social Security payments. Since 2002, 80% to 90% of respondents, including 88% in April 2024, have stated that their Social Security payout is necessary to make ends meet. 

The new COLA increase and its impact on Social Security benefits

The Social Security Administration’s (SSA) annual COLA announcement is the most anticipated news for beneficiaries, as these poll results show. After many months of waiting, the final percentage was announced on October 10, but because the 2.5% COLA increase is significantly lower than last year, it brought a mixed bag of good and bad news for Social Security beneficiaries in the coming year. 

The cost of living adjustment (COLA), which you’ve probably heard about for weeks, is the SSA’s tool for adjusting Social Security benefits to account for the impact of inflation. Consider a scenario in which the price of purchasing a wide range of goods and services increases by 3%. Retirees’ purchasing power would gradually decline due to inflation (increasing prices) if Social Security payouts didn’t rise. To prevent beneficiaries from losing their purchasing power, COLA is only the “raise” that is passed along most years.

When Social Security was first enacted in 1935 and continued until 1974, there was no logic or rationale for benefit adjustments. The first COLA was enacted by a lame-duck session of Congress a little more than a decade after the first retired worker’s check was delivered in January 1940. In addition, beginning in 1975, price changes were tracked using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). This allowed for annual cost-of-living adjustments, a significant step forward for America’s premier retirement program.

How is the cost of living adjustment calculated?

It is important to note that Social Security’s COLA computation only takes into account the trailing 12-month values that end in the third quarter (July, August, and September), even though the CPI-W is reported monthly. Checks from Social Security will increase if the average Q3 CPI-W reading for this year is greater than it was for the same period last year. The percentage change in average Q3 CPI-W readings from year to year, rounded to the nearest tenth of a percent, represents the amount of the rise that is distributed to recipients. 

Throughout the 2010s, recipients had little to look forward to. This decade had only three years of deflation in the recent half-century, resulting in no COLA being passed on (2010, 2011, and 2016), as well as the smallest positive COLA on record (0.3% in 2017). But in recent years, there has been a significant shift in the tide. The biggest annual rise in the U.S. money supply was caused by the COVID-19 epidemic, which caused the current inflation rate to soar to a four-decade high. After a decade of mainly weak COLAs, beneficiaries received hikes of 5.9% in 2022, 8.7% in 2023, and 3.2% in 2024. 

On October 10, following the release of the final puzzle piece required to compute Social Security’s 2025 COLA (the September inflation data), the SSA revealed that beneficiaries’ monthly payments would increase by 2.5% in the coming year. Even though it is the least significant increase in benefits over the previous four years, it nevertheless constitutes a gain that is above average. A more moderate 2.3% has been the average cost-of-living adjustment since 2010.

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