Social Security Increase 2025: What You Need to Know

Social Security beneficiaries can once again expect a cost-of-living pay increase next year.

Introduced by Congress in 1973, annual cost-of-living adjustments (COLAs) regularly modify the monthly benefit for those receiving Social Security to match the cost of living. These adjustments came into effect in 1975, and they’ve helped those receiving benefits protect their retirement ever since.

But what does that mean for those who plan to receive Social Security in 2025?

How do they calculate COLA?

Social Security cost-of-living adjustments are calculated using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), a subset of the broader Consumer Price Index (CPI).

The CPI-W is released monthly by the Bureau of Labor Statistics (BLS) and helps us understand how changes in prices might affect everyday workers or those who perform clerical work.

To find the Social Security COLA, experts compare the CPI-W of the third quarter of the current year with the CPI-W of the third quarter of the year the previous COLA took effect. If they find an increase, they announce a COLA for the following year.

What You Need to Know About COLA 2025

The rising cost of living has made headlines this past year.

As we enter the third quarter, it’s natural for many to speculate what the COLA for 2025 might be. While the news speculates what that could mean for those receiving Social Security next year, you should know a few things about the increase.

1. The increase happens automatically

Current Social Security or Supplemental Security Income (SSI) beneficiaries do not need to do anything to receive their COLA increase.

Once the Social Security Administration puts it into place, it’s official: your benefits increase. Because of the way benefits get paid, you should see the increase reflected in your checks the following January.

2. Expected Social Security Increase for 2025

At the time of this writing, the projected COLA for 2025 is 2.5%, a significant decrease from the 8.7% increase in 2023 and 3.2% in 2024. This lower COLA reflects cooling inflation.

While more modest than in recent years, this adjustment aims to help Social Security recipients maintain their purchasing power in the face of rising costs, hoping to help them continue to afford essential goods and services.

3. The total increase isn’t set yet

Because the increase is based on the CPI-W for the entire third quarter, it’s not yet set in stone. For that, we have to wait for the quarter to end on September 30th. The final decision on next year’s COLA should be announced the following month.

The current estimate of 2.5% could change between now and the final COLA announcement.

4. Your increase is based on your current income

It’s important to remember that the COLA increase is a percentage. This means that Social Security benefits increase differently for every recipient.

For the average Social Security recipient, a 2.5% COLA would increase their monthly benefit checks by roughly $48.

5. Medicare Costs Could Offset COLA Gains

Rising Medicare Part B premiums may significantly reduce the net benefit for Social Security recipients. In 2025, Part B premiums are estimated to be $185 per month—a monthly increase of roughly $10.

This increase could offset a substantial portion of the COLA, highlighting the importance of considering net benefits after Medicare deductions. It also highlights why it’s crucial to prepare early for healthcare in retirement.

6. Historical Context of the 2025 COLA

The projected 2.5% COLA for 2025 aligns closely with the 20-year average of 2.6%, providing a more typical adjustment compared to recent fluctuations.

This perspective is crucial when considering years like 2010 and 2016, which saw no COLA at all, in contrast to the substantial 8.7% increase in 2023.

Are there downsides to a COLA increase?

The benefits of a COLA increase seem obvious: retirees receive more money, which hopefully allows them to continue to afford their retirement lifestyle.

However, increased Social Security benefits can also come with a couple of disadvantages.

To be clear, these disadvantages would most likely affect a minority of recipients whose income is currently approaching important benchmarks.

For instance, a Social Security increase could:

Bump recipients into higher tax brackets

Retirees with income below $25,000 (for individuals) or $32,000 (for joint filers) have the additional benefit of not paying taxes on their Social Security.

However, for those on the cusp of the limit, a 2.5% COLA increase could be just enough to bump them into the next tax bracket.

If their new income is between $25,000 and $34,000, they could pay up to 50% tax on their Social Security benefits. If their income gets bumped over the $34,000 mark, they could owe up to 85% in taxes on their Social Security.

Disqualify those who receive help based on need

Retirees who receive additional help based on financial need could suffer from an income increase. If their current income is just below the benchmark for receiving aid, a 2.5% bump might disqualify them from receiving that needs-based assistance.

However, disqualification depends on thresholds established by specific programs and can vary.