Social Security benefits are adjusted annually to account for inflation in the previous year. For instance, retirees and other beneficiaries will receive a 2.5% cost-of-living adjustment (COLA) in 2025 to account for rising prices in 2024. Unfortunately, that will be the smallest increase in payments since 2021 and falls below the 10-year average of 2.75%.
However, the most concerning news regarding the 2025 COLA comes from the October inflation report. While pricing pressures have gradually eased during the year, inflation reaccelerated in October. That puts Social Security benefits on course to lose buying power next year, which is bad news for retirees given that most already see the 2025 COLA as insufficient.
Read on to learn more.
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How the Social Security Administration calculates cost-of-living adjustments (COLAs)
Social Security’s annual cost-of-living adjustments (COLAs) are calculated based on how inflation changes in the third quarter, the three-month period from July through September. In this scenario, inflation is measured using a subset of the Consumer Price Index (CPI) known as the CPI-W.
Specifically, the third-quarter CPI-W from the current year is divided by the same figure from the previous year, and the percent increase becomes the COLA in the next year. For example, the CPI-W climbed 2.5% in the third quarter of 2024, so Social Security benefits will receive a 2.5% COLA in 2025.
The latest inflation report was bad news for retired workers on Social Security
CPI-W inflation gradually decelerated during the first three quarters of the year, cooling from 2.9% in January to 2.2% in September. However, CPI-W inflation unexpectedly rose to 2.4% in October. That reacceleration poses a problem for retired workers, and the problem may get worse because other economic data suggests CPI-W inflation could tick higher in the next month or two.
Specifically, the Producers Price Index (PPI) for final demand increased 2.4% in October, an acceleration from 1.9% in September. PPI for final demand measures inflation on goods, services, and construction from the perspective of producers.
It’s commonly seen as a leading indicator for the CPI because producers usually pass cost increases to consumers. Consequently, the recent uptick in the PPI may portend a further uptick in the CPI-W.
Regardless, the fact that CPI-W inflation reaccelerated in October is bad news for retirees. Social Security’s annual cost-of-living adjustments essentially reimburse recipients for the purchasing power benefits lost in the previous year. That means the COLA must meet (or exceed) CPI-W inflation for Social Security benefits to retain (or gain) purchasing power.
Unfortunately, the opposite is happening this year. CPI-W inflation increased 2.9% through the first 10 months of 2024. While the latest reading of 2.4% pulled the average down, a lower reading would have pulled it down faster. Full-year CPI-W inflation will likely increase more than 2.5% in 2024, which means the 2.5% COLA will not fully reimburse recipients for the purchasing power benefits lost. That’s bad news for retired workers on Social Security.
What retirees can do to earn extra income in 2025
The Federal Reserve started cutting its benchmark interest rate in September, so other interest rates across the economy are falling. That said, the median annual percentage yield (APY) on short-term certificates of deposit (CDs) is still above 4%, and now is a great time to lock in such a rate. Likewise, many high-yield savings accounts are still paying more than 4%.
Alternatively, the U.S. stock market is having one of its best years of the 21st century, and all three major indexes are near record highs. That makes the present a good time to sell stock. Additionally, with the end of the year approaching, retired workers can use tax-loss harvesting to offset any capital gains.
