According to new data from the U.S. Bureau of Labor Statistics, inflation continues to fall. The August 2024 Consumer Price Index report shows a 2.5% increase in average prices over the last 12 months, down from 2.9% in July. That’s the smallest 12-month increase since February 2021. The Social Security Administration will use this inflation data to set new cost-of-living adjustments, also known as COLA.
The Social Security Administration announces these adjustments every October, which will be applied to monthly benefit checks issued the following year. That said, some experts predict the next year’s COLA before it is officially announced. The Senior Citizens League, for instance, estimates the COLA for 2025 could be 2.5%.
As Americans look ahead to benefit adjustments for 2025, it can be helpful to know:
— How the Social Security COLA is determined
— How the Social Security COLA changes
— Ways for Social Security beneficiaries to earn more
— How to prepare financially for COLA
[Read: How to Correct Your Social Security Earnings Record.]
How the Social Security COLA Is Determined
There is a method that is used to establish the COLA every year. The Social Security Administration reviews the percentage changes in the consumer price index (CPI) during the third quarter from one year to the next. This information is applied to the calculations for the upcoming COLA.
If the CPI shows low rates, it is an indicator that living expenses for Americans, on average, have not climbed significantly during the last months. Higher rates reflect rising costs and steeper inflation. “Ultimately, the Social Security Administration determines its cost-of-living adjustment based on its expectations for the rate of inflation in the next year,” said Krieg Tidemann, assistant professor of economics at Niagara University, in an email.
The idea is to help retirees have enough to cover their needs every year.
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How the Social Security COLA Changes
Some experts predict the COLA for the following year before it is officially announced. The Senior Citizens League, for instance, estimates the COLA could be 2.5% for 2025, down from its July estimate of 2.57%.
In 2023, the Social Security Administration indicated the COLA would increase by 3.2% in 2024. Beginning in January 2024, checks reflecting those increases were sent to the more than 66 million retirees who receive Social Security benefits. According to the Social Security Administration, beneficiaries saw an average increase of more than $50 per month.
In 2023, the COLA increased by 8.7%, its largest increase since 1981. This followed a 5.9% increase in 2022, which was the highest in four decades at the time it was issued. A check of $1,000 in 2021 would have increased to $1,059 in 2022. Following the COLA of 2023, the amount would have gone up by an estimated $92 to $1,151. The additional 3.2% bump led to an increase of $37 on the 2023 payout, making a benefit amount of $1,188 in 2024.
| Year It Takes Effect | COLA |
| 2025 (estimate) | 2.5% |
| 2024 | 3.2% |
| 2023 | 8.7% |
| 2022 | 5.9% |
Monitoring the Consumer Price Index
According to the U.S. Bureau of Labor Statistics, the CPI for August 2024 increased 0.2% on a seasonally adjusted basis, the same increase as in July. All items increased by an average of 2.5% during the previous 12 months. Overall, inflation in 2024 has been lower than in 2022, which saw 40-year highs such as 9.1% in June of that year.
The CPI can be continually monitored to make future estimates. “Remember that COLA is directly tied to inflation,” said Jeremy Keil, a financial advisor at Keil Financial Partners in New Berlin, Wisconsin, in an email. “The only reason COLA was so high in 2022 and 2023 is because inflation was so high in 2021 and 2022.”
This could be a sign of continued cooling inflation, and rates that might coincide with historic averages during the previous decades. “Prior to 2022, the 30-year COLA average was 2.4%, so hopefully this is a sign that inflation is returning to normal,” Keil said.
[READ: How Raising the Retirement Age Could Help or Hurt Seniors]
Ways for Social Security Beneficiaries to Earn More
The COLA increases in recent years may be helping retirees cope with current costs. That said, some individuals may decide they need more income to support their lifestyles. Taking a part-time job can help retirees bring in additional income. For retirees who prefer flexible, remote work, many jobs can be done entirely online.
If you take benefits and have a job before your full retirement age, you can earn up to a certain amount. If your income exceeds that amount, your benefits will be reduced. Once you reach your full retirement age, there won’t be limitations on what you can earn. Additional supplemental income could come from retirement accounts such as a 401(k), IRA or pensions.
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What Will the Social Security COLA Raise Be for 2025? originally appeared on usnews.com
Update 09/11/24: This story was previously published at an earlier date and has been updated with new information.
