What Is a Social Security COLA, and How Can It Affect Your Retirement Plan in 2025?

Whether you're currently retired and collecting Social Security or you're still in the planning stages, chances are you've heard of the cost-of-living adjustment, or COLA.

The COLA is essentially an annual "raise" that's designed to help benefits maintain their buying power over time. Because Social Security benefits are for life, they should be able to keep up with inflation over the decades.

While the COLA may sound simple and straightforward, the program is facing some issues that could affect your retirement in 2025 and beyond. Here's everything you need to know about how to plan for retirement with the COLA in mind.

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How is the Social Security COLA determined?

The actual calculations determining the COLA are quite complex, but at its core, the adjustment is meant to reflect changes in inflation from year to year.

It's based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which is released monthly by the U.S. Bureau of Labor Statistics. This index measures the average changes in prices for particular goods and services.

The Social Security Administration uses third-quarter data from the CPI-W, taking an average of the values for the months of July, August, and September. If the average is higher than the average from the same period the year prior, the percent difference will be the COLA for the next year. If it's lower, there will be no COLA that year.

Historically, the COLA tends to fall between 1% and 3% per year -- though we have seen some record-breaking adjustments in recent years as inflation soared. Because the COLA is tied directly to changes in costs, higher inflation generally leads to higher raises, too.

Source: Social Security Administration. Table by author.

In 2024, the adjustment was 3.2%. So, for example, if you're collecting $2,000 per month in Social Security benefits, you would have received an extra $64 per month starting in January of this year.

The Social Security Administration is expected to announce the COLA for 2025 later this month, and that adjustment will take effect in January of next year.

Potential challenges going forward

The COLA can be a lifeline for many retirees, especially as costs continue to surge and money is tight for those living on a fixed income. Every dollar counts, and this annual raise can go a long way.

However, despite the fact that the COLA is designed to keep up with inflation, it's struggled to do just that. In fact, Social Security benefits are actively losing buying power over time, meaning they won't go nearly as far as they did even a decade or two ago.

A 2024 report from nonprofit advocacy group The Senior Citizens League found that since 2010, benefits have lost 20% of their purchasing power. Furthermore, the average beneficiary would need approximately $370 more per month just for Social Security to hold the same value as in 2010.

The problem also seems to be worsening in recent years. In four of the last five years, the inflation rate surpassed the COLA for that year, the report revealed. The only year in which the COLA was able to outpace inflation was 2023, which happened to have the highest COLA in four decades.

Some experts have urged the Social Security Administration to adjust how it calculates the COLA, perhaps using the CPI-E (which tracks changes in spending of those age 62 and older) instead of the CPI-W, which measures spending patterns of working-age adults.

Basing the COLA on the CPI-E would likely result in larger COLAs, as seniors often devote more of their budgets toward costs like housing and basic necessities -- which have skyrocketed in recent years compared to many other expenses. However, because the Social Security program is already facing cash problems related to its trust funds, it's unlikely it will make any changes that could exacerbate that issue.

How this could affect your retirement

Social Security's loss of buying power will most significantly affect those who are relying heavily on their benefits in retirement -- which accounts for around 60% of current retirees, according to a 2024 poll from Gallup.

Perhaps the best thing you can do, if possible, is to find ways to reduce your dependence on Social Security. That could involve saving more, if you're still working, or finding other sources of income. You could also see if there are ways to reduce your expenses, helping stretch your savings a little further.

This won't be possible for everyone, and many retirees are already stretched thin financially. But at the very least, staying aware of the situation can go a long way. By making whatever adjustments you can to reduce your reliance on Social Security, the less affected you'll be by any challenges the program may face.

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