One of the most important parts of Social Security is the annual cost-of-living adjustment, or COLA. The COLA is designed to help your monthly checks keep up with rising prices for everything from groceries, to medical bills, to the cost of housing. The Social Security Administration announces the next year's COLA in October each year.
Many retirees are eager to start collecting larger checks, as high inflation between 2021 and 2023 led prices to climb dramatically. Many households are still reeling, trying to catch up to today's prices.
In October, the Social Security Administration announced retirees will receive a 2.5% COLA. Here's how much the average retirement check will increase in January.
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How the government calculates Social Security's COLA
Before we dive into the details of the 2025 COLA, it's important to understand how the Social Security Administration calculates the annual adjustment.
The COLA is based on changes in the Consumer Price Index (CPI). The CPI measures inflation based on consumer pricing for various spending categories, including food, housing, transportation, and medical expenses, among others.
The Social Security Administration uses a subset of the CPI referred to as the CPI-W, which tracks a basket of goods representative of the purchasing habits of urban wage earners and clerical workers. It tracks the change in CPI-W throughout the third quarter, and the average year-over-year increase during the period is what it uses for the COLA the following year.
Some argue the process is too narrow, focusing on just one quarter of the year. Some say the government should use different data to calculate the COLA. There's even a CPI subset that tracks the costs of a basket of goods more representative of senior's spending, called the CPI-E. But this is the system we use for now. The result for 2025 is a 2.5% increase.
Here's how much the average retirement check will increase
Since the COLA is percentage based, it means the amount of your Social Security raise will depend on how much you were already receiving. Retirees will receive an update in the mail with the details about how much they'll receive, starting with their check in January.
The average Social Security retirement benefit in October was $1,924. With the 2.5% COLA, someone receiving the average retirement check will get a $48 raise, bringing their total benefit to $1,972.
But many retirees won't see the entirety of their COLA show up in their monthly check starting in January. The Social Security Administration may deduct a portion of your Social Security check for certain items. The one that will impact the most people is Medicare Part B premiums. Anyone enrolled in Medicare while collecting Social Security will see the amount of their premiums automatically deducted.
The monthly Part B premium will increase $10.30 to $185 per month for individuals with adjusted gross incomes below $106,000, or couples with AGIs below $212,000. Those with higher incomes may be subject to higher premiums. In effect, that makes that average $48 raise more like $38.
The good news for those with small Social Security checks is that you won't see your benefits decrease as a result of the increase in Medicare Part B premiums. If the premium increase is more than your COLA, the government will make up the difference on its end.
It's important to understand not only how the government calculates your COLA, but also how it applies to your specific Social Security check. Be sure to read your statements carefully to ensure you understand everything from your full Social Security benefit to the net amount the government cuts you a check for.
