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

Social Security is a valuable source of income for tens of millions of retired workers, disabled workers, spouses of workers, and more. And with pensions declining in popularity in recent years, Social Security is the only source of inflation-protected income many retirees have, and the annual COLA is the reason why.

The Social Security COLA, or cost-of-living adjustment, is the process by which the Social Security Administration increases benefits to keep up with rising costs over time. While the general idea of the COLA is well understood by most Social Security recipients (benefits go up once a year), the process of calculating the COLA is not. So here's a quick rundown of what all retirees should know about the COLA and what could potentially change in the future.

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Where does the COLA come from each year?

The way the Social Security COLA is determined might not be what you think.

Specifically, the COLA isn't based on year-to-year inflation. Rather, it compares third quarter inflation data (July, August, and September) from each year with the previous year to determine the raise beneficiaries will get.

The inflation metric that is used to calculate the COLA is the Consumer Price Index for Urban Wage Earners and Clerical Workers, which is abbreviated as the CPI-W. This data is usually released within two weeks of the end of each month, so this is why the COLA is typically announced in mid-October (after September's data is available).

For example, to determine next year's COLA, the Social Security Administration will compare CPI-W data from July September 2025 with that from the same period in 2024. The difference is rounded to the nearest one-tenth of one percent, and that's how the COLA is determined. It's also worth noting that if the CPI-W has declined, there's no such thing as a negative COLA. It will simply be zero.

As a final housekeeping note, one thing that can get confusing is that the COLA officially goes into effect in December of each year. However, because Social Security benefits are paid a month in arrears, it doesn't show up in the payments retirees receive until January. So, the raise that Social Security beneficiaries just got was technically the 2024 COLA since it was given in December 2024. But because nobody received these payments until January, it is commonly referred to as the 2025 COLA.

How much is the typical COLA?

Since the modern method of calculating the COLA went into effect in 1975, the average annual increase has been 3.8%. The highest Social Security COLA was a 14.3% raise in 1980, while there have been 0% COLAs in three different years (2008, 2009, and 2015).

One major flaw with the COLA

As mentioned, the Social Security COLA calculation uses the CPI-W, or the Consumer Price Index for Urban Wage Earners and Clerical Workers. But as that description implies, this is an inflation index that is designed to track expenses as they relate to people who are still working, not retirees.

There are some expense categories that have a disproportionate impact on older Americans. Healthcare is the most obvious, as seniors tend to use healthcare services more often, and spend more when they do. Housing is another, as the average retired household spends a greater percentage of their income on housing costs than the typical American household.

There is an alternative inflation index, known as the CPI-E, which places more weight on expenses that impact retirees. But under current law, it isn't used in the Social Security COLA calculation.

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