Social Security issues 2.5% COLA increase. Here’s why it keeps falling.

Social Security recipients will see a 2.5 percent increase in their monthly checks next year, the federal government announced Thursday. It’s a smaller hike than in recent years, which was expected given the cooling of inflation.

Soaring prices in recent years brought unusually large cost-of-living increases in benefit checks, since Social Security payouts are automatically adjusted once a year based on a government measure of inflation. The annual adjustment, known as COLA, brought seniors a 5.9 percent boost in 2022, an 8.7 percent increase in 2023 (the largest in about 40 years) and a 3.2 percent increase in 2024.

Here’s what you need to know.

How much will Social Security benefits increase in 2025?

The 2.5 percent increase will apply to all Social Security checks for retirees and people with disabilities beginning at the start of 2025.

For the average retiree who now receives $1,907 monthly, that represents a monthly raise of about $48. Beneficiaries who receive the maximum monthly benefit, which is $4,873 this year, will see about $122 more per month next year.

The nation’s 67 million Social Security beneficiaries will get personalized letters in December telling them how much their own benefits will increase.

“A low cost-of-living adjustment means that seniors’ purchasing power wasn’t eroded as much as in previous years,” said Romina Boccia, director of budget and entitlement policy at the libertarian Cato Institute. “People shouldn’t think of this as a bonus on top of their benefit, but rather as a necessary adjustment to make sure that their benefit is able to buy as many goods and services as previously.”

For workers, the amount of income subject to Social Security taxes rises with inflation too, though the cap is high enough that it doesn’t affect most wage earners. This year, workers pay Social Security taxes on their first $168,000 in income; next year, that will rise to $176,000.

How is the COLA increase calculated?

Since 1975, federal law has made annual adjustments to Social Security benefits an automatic calculation rather than letting lawmakers decide. The increase is based on the average inflation during the third quarter - July, August and September - as measured by the consumer price index for Urban Wage Earners and Clerical Workers (CPI-W). It’s intended to reflect cost-of-living changes over a one-year period.

As the cost of living increases, benefits are supposed to automatically rise so seniors can still afford the same necessities.

Calculating the cost of living is not without controversy. Analysts on both the left and right have argued that the government should change the precise measurements it uses to determine the COLA, in ways that would either increase or decrease seniors’ benefits.

As the Social Security Trust Fund comes closer to the date when it is projected to run out of money, about a decade away, some Republicans have raised the idea of saving money by ending COLA increases for better-off seniors or leaving COLAs up to congressional discretion rather than making the increases automatic. Neither idea has gained much traction politically.

Will seniors’ Social Security benefits keep up with their expenses?

Some advocates on the left say that the specific index used to calculate COLAs - which is based on urban workers’ expenses - fails to account for the rising cost of health care, which tends to outpace other inflation. This could leave seniors behind, even with the increases in their Social Security checks.

“So many beneficiaries really don’t understand that it’s automatic and it’s mechanical. It’s not political. Nobody plays around with the numbers,” said Nancy Altman, who leads the advocacy organization Social Security Works. “When it’s high, they tend to give credit to whatever administration is there.”

Before Thursday’s announcement, she predicted frustration among beneficiaries who have high bills and want more money in next year’s checks.

“Clearly seniors have higher expenses than the cost-of-living adjustment reflects,” Altman said. “Health-care costs, drug prices: Those kind of things have been rising faster than flat-screen TVs and the latest iPhones.”

When seniors get next year’s modestly larger checks, she said, “I think they’re going to be disappointed.”