Retirement wouldn’t be possible for many Americans without Social Security. Roughly two in five Americans 65 and older rely upon it to provide over half their financial support, with more than one in 10 counting upon it for at least 90% of their support, according to the Social Security Administration (SSA).

This dependence makes the high inflation of the last few years especially concerning, as Social Security checks generally remain fixed throughout the year. But that all changes — at least a bit — with the annual cost-of-living adjustment (COLA).

Image source: Getty Images.

COLAs provide a much-needed boost to all retirees’ checks, and the 2025 COLA is almost here. But to make the most of it, it helps to understand how COLAs work.

1. What a COLA is

COLAs are increases the SSA applies to all beneficiaries’ checks in most years. It’s intended to counter inflation, and it’s listed as a percentage. For example, in 2024, beneficiaries got a 3.2% COLA. This leads to a different dollar-value increase for everyone.

To calculate the COLA, the government looks at the difference in third-quarter inflation data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). This measures the changing price of a basket of common goods and services over time.

Basically, the SSA adds up the CPI-W figures for July, August, and September of the current year and compares it to the average of the figures from the same months in the year before. The difference is the COLA for the following year.

2. When the 2025 COLA announcement is coming

The SSA announces the COLA for the next year as soon as the September CPI-W figure is available. This year, that’s Oct. 10. It’ll post the news Thursday morning on the SSA website.

We don’t know for sure what the COLA will be, but cooling inflation tells us it’s probably going to be the lowest we’ve seen since 2021. The Senior Citizens League (TSCL), a nonpartisan senior group, estimates that it’s going to come in around 2.5%.

3. How the government applies the COLA to your checks

Calculating your 2025 checks isn’t technically as simple as adding the COLA percentage to your current checks:

• First, the SSA applies the COLA to your primary insurance amount (PIA). That’s the benefit you’d get if you applied for Social Security at your full retirement age (FRA) — 66 to 67 for today’s workers.
• Then, the SSA adjusts your new PIA up or down based on your claiming age:
  • If you applied more than 36 months under your FRA: It’ll shrink your checks by 20% plus 5/12 of 1% per month for every month of early claiming beyond 36.
  • If you applied 36 months or less under your FRA: It’ll shrink your checks by 5/9 of 1% per month for every month you received checks under your FRA.
  • If you applied right at your FRA: It won’t make any changes. Your new benefit will be your new PIA.
  • If you applied after reaching your FRA: It’ll add 2/3 of 1% per month for every month you delayed your claim past your FRA. These increases continue until you either apply or reach your maximum benefit at 70.

The result is your new benefit amount. But you don’t have to go through these steps to get an approximation of your 2025 benefit. Applying the COLA percentage to your current checks gets you close. It’ll probably be off by a dollar or two at most.

If you’re unsure whether you’ve calculated your new checks correctly, wait for the personalized COLA notice the SSA sends to all beneficiaries in December. You should get something in the mail. You may also be able to access this notice online through the Message Center in your my Social Security account in early December.

4. When you’ll get your first checks with the 2025 COLA

The SSA will apply your 2025 COLA to the December 2024 payment. But since it pays Social Security checks in the month after the month they’re due, you won’t get your first checks with the new amount until January. The exact payment date depends on the day of the month you were born:

• Born between the 1st and the 10th: Jan. 8, 2025
• Born between the 11th and the 20th: Jan. 15, 2025
• Born between the 21st and the 31st: Jan. 22, 2025

You’ll continue to receive checks on either the second, third, or fourth Wednesday of each month, depending on your birthday, throughout the year.

5. COLAs aren’t keeping up with inflation

As mentioned above, COLAs are supposed to help Social Security’s buying power remain steady over time. But they’re not actually doing that very well. TSCL reports that Social Security has lost 20% of its buying power since 2010, and this trend seems likely to continue.

The average check would have to increase by more than $370 per month to recoup this lost buying power, according to TSCL. But a 2.5% COLA would boost the $1,920 average monthly benefit as of August 2024 by just $48.

So while larger Social Security checks are certainly something to look forward to next year, you may also have to make some tough choices regarding your budget. Planning in advance of the new year and looking for opportunities to diversify your retirement income can lessen the blow.

The $22,924 Social Security bonus most retirees completely overlook

If you’re like most Americans, you’re a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $22,924 more… each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we’re all after. Simply click here to discover how to learn more about these strategies.

View the “Social Security secrets” »

The Motley Fool has a disclosure policy.