America’s cost of living is almost always pointed north. Jump back in time, and you could buy a candy bar for a nickel. Nowadays, there’s very little you can buy with the spare change in your pocket.
That’s a particularly problematic trend for retirees, who commonly live on a fixed income. Fortunately, one of their primary sources of funds—Social Security—accounts (and corrects!) for inflation.
Today, we’re going to talk about the annual Social Security cost-of-living adjustment (COLA), including how it’s calculated, what economic factors impact it, historical changes, and more.
What Is the Cost-of-Living Adjustment (COLA)?
Roughly half of American adults age 65 or older receive at least 50% of their family income from Social Security, and about a quarter receive 90% or more from the program, according to data from the Social Security Administration (SSA).
So if Social Security checks remained stagnant while prices endlessly marched higher, it’s safe to say that millions of Americans would suffer.
That’s precisely why, starting in 1975, Social Security began the practice of making automatic cost-of-living adjustments (COLAs).
The COLA is an annual, formulaic tweak to Social Security benefits that reflects changes in consumer prices. The goal: Prevent inflation from diminishing the purchasing power of Social Security and Supplemental Security Income (SSI) benefits.
“The COLA is a vital component of Social Security, ensuring older Americans have an inflation-protected source of income in retirement,” AARP CEO Jo Ann Jenkins says. “This adjustment means older Americans will receive needed relief to help better afford essential items, from groceries to gas.”
How Is the COLA Calculated?
The adjustment is calculated based on changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
This mouthful of an index is overseen by the Labor Department’s Bureau of Labor Statistics (BLS), which describes the index as “a monthly measure of the average change over time in the prices paid by urban wage earners and clerical workers for a market basket of consumer goods and services.”
A COLA calculation is quite straightforward. It’s simply the percentage increase in CPI-W from the third quarter of the most recent year a cost-of-living adjustment was made, to the CPI-W from the third quarter of the current year. The SSA announces this change in mid-October of the current year, and the COLA goes into effect starting in January of the next year.
If there’s an increase in CPI-W, a COLA will be announced, and Social Security benefits will be increased by the same percentage. Percentages are rounded to the nearest tenth of a percent.
If there’s no increase in CPI-W, no COLA will be announced that year. But that’s a rarity—2010, 2011, and 2016 are the only three years in which there was no cost-of-living adjustment.
Example: Let’s say Q3 2026’s CPI-W is 1.0% higher than Q3 2025’s CPI-W. In mid-October 2026, the SSA would announce a 1.0% cost-of-living adjustment, and Social Security recipients’ benefits would reflect that increase starting in January 2027.
Related: 8 Special Tax Breaks for Senior Citizens
How Much Was the 2025 COLA?
The 2025 COLA was announced on Oct. 10, 2024. It was 2.5%—not only smaller than the 2024 increase of 3.2%, but the smallest increase since 2021.
The annual COLA can vary substantially from one year to the next. Just take a look at the past five years’ worth of cost-of-living adjustments:
| Past COLAs | |
|---|---|
| Year | % Increase |
| 2020 | 1.6% |
| 2021 | 1.3% |
| 2022 | 5.9% |
| 2023 | 8.7% |
| 2024 | 3.2% |
It’s important to note that COLA often won’t align with what most of us think of when we think about inflation. That’s because:
- The index cited when reporting headline inflation is simply the Consumer Price Index (CPI), not CPI-W.
- Any given year’s inflation rate is calculated with data from across the entire year, whereas COLA is based on a Q3-to-Q3 reading.
For context, consider the five years’ worth of CPI-W growth that led to the 2020-24 COLA increases, and the corresponding CPI growth in those same years.
| Inflation Rates | ||
|---|---|---|
| Year | CPI-W | CPI |
| 2019 | 1.6% | 1.8% |
| 2020 | 1.3% | 1.2% |
| 2021 | 5.9% | 4.7% |
| 2022 | 8.7% | 8.0% |
| 2023 | 3.2% | 4.1% |
Related: How Much Social Security Will I Receive?
When Will I Receive My First Increased Payment?
The 2025 COLA will impact benefit checks in January 2025—for most Social Security recipients, anyways.
When exactly you’ll see the higher benefit check predominantly depends on where your birthday falls within your birth month. Here’s when most people can expect their Social Security checks to arrive:
| Expected Benefit Arrival Dates | |
|---|---|
| Birthday falls on | Check should arrive |
| 1st-10th | Jan. 8, 2025 |
| 11th-20th | Jan. 15, 2025 |
| 21st-31st | Jan. 22, 2025 |
However, there is an exception: Anyone who has received Social Security benefits since before May 1997 will receive their first 2025 benefits check on Jan. 3.
Supplemental Security Income (SSI) checks reflecting the new payment will be sent out Dec. 31, 2024. Typically, SSI checks go out on the first of the month, but January’s checks are always pushed up a day because New Year’s Day is a federal holiday.
Related: Does Your Credit Score Matter in Retirement?
Social Security Work Credits Will Change, Too
The COLA isn’t the only change coming to Social Security in 2025. Americans also will need to earn more to qualify for the program.
Americans must accumulate 40 work credits during their lifetime to qualify for Social Security retirement benefits. You do that by reaching a certain level of “covered earnings”—earnings subject to Medicare taxation.
And just like Social Security can announce a COLA every year, the amount required to earn a work credit can go up any given year, too. When that happens, the SSA announces the work credit threshold alongside the COLA.
For 2025, you must make at least $1,810 in covered earnings during a quarter to receive a work credit, up from $1,730 in 2024. And you can compile a maximum of four work credits per year, at $7,240 in total earnings. (Note: You can earn work credits at a faster rate than once per quarter. For instance, if you made $7,240 in covered earnings during your first month of work, you would earn all four credits for the year.)
Other Updates for 2025
Social Security announced other updates pertaining to taxes and worker earnings limits:
- In 2025, the maximum earnings subject to Social Security tax will be $176,100, up from $168,600 in 2024.
- Workers who are younger than full retirement age (FRA), but are collecting Social Security benefits, have an earnings limit of $23,400 in 2025 (up from $22,320 in 2024). That means the SSA will deduct $1 for every $2 earned over $23,400 in 2025.
- Meanwhile, beneficiaries who work and will reach FRA in 2025 will have an earnings cap of $62,160 in 2025 (up from $59,520 in 2024). That means the SSA will deduct $1 for every $3 earned over $62,160 up until the month the worker reaches FRA.
How Big Is the Average Social Security Benefits Check?
It’s difficult to understand how much of a difference the COLA makes without knowing the size of the average Social Security check.
As of July 2024, the average monthly check for a Social Security retirement benefits recipient was $1,783 … but that number can vary substantially by person.
How much you receive as your benefit depends on several factors, including the age you started taking Social Security, your lifetime earnings, the number of years you worked, and, in certain circumstances, whether you’re a government worker with a pension affected by the Windfall Elimination Provision.
Also, some people receive Social Security spousal benefits, so their eligibility is largely based on their spouse’s work history, rather than their own.
Related: What Is Medicare? A Guide to Types of Medicare Coverage
How Can Retirees Protect Their Savings From Inflation?
The COLA helps protect one’s Social Security payments against inflation … but it doesn’t protect any of your retirement savings or investments.
The only way to do that is to ensure, at the very least, your money is growing at the rate of inflation. Though ideally, you should aim for better than that.
“When you’re in retirement you can’t afford to stay only in a low-interest rate investment like a CD just because it’s safe,” Kelly LaVigne, VP of Consumer Insights at Allianz Life, told Young and the Invested in an interview. “You also need to have at least some of your retirement funds in a position to grow a bit more than inflation will.”
He encourages people to take a look at their financial strategy and talk to a financial advisor about it. Depending on your situation, you might need to invest at least a portion of your portfolio more aggressively to stay well ahead of inflation over the long term.
