Every year, the Social Security Administration, or SSA, examines inflation data and adjusts Social Security benefits accordingly. In short, the annual cost-of-living adjustment, or COLA, is designed to help retirees keep up with the rising cost of goods and services.

While most retirees and soon-to-be retirees know what the COLA is, there is a lot about the Social Security COLA that isn’t understood by many retirees. Here’s a rundown of some of the important COLA facts to know before you start collecting Social Security retirement benefits.

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How the Social Security COLA is determined

The Social Security COLA is determined by comparing the Consumer Price Index (CPI) from the third quarter of the current year with the third quarter of the previous year. In other words, the 2025 COLA will be determined by using the CPI data from July, August, and September of 2025 and comparing it with the same months in 2024.

It doesn’t always keep up with the cost of living

There are several versions of the CPI, and the Social Security COLA uses the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W. However, as the name suggests, this is intended to measure the effects of inflation on working Americans.

There’s another index, known as the Consumer Price Index for Americans 62 and older, or CPI-E, for short. This places more weight on the types of expenses that are more likely to impact seniors, such as healthcare. It is estimated that if the COLA formula was changed to the CPI-E, it would result in an average COLA that is about 0.2 percentage points higher every year.

The COLA goes into effect in December, not January

This is more of a technical point, but the Social Security COLA that just went into effect was the 2024 COLA, not the 2025.

Each year, the Social Security COLA officially takes effect in December. However, since Social Security is paid a month in arrears, that means it is first reflected in the payment that Americans receive in January, which is why it is usually labeled as the following year’s COLA.

Having said that, for the purposes of this discussion, we’ll refer to the recent 2.5% increase as the “2025 COLA.”

The 2025 COLA is the lowest in four years

Inflation has cooled off quite a bit since the spike we saw a few years ago, and the COLA has decreased as a result. In fact, the 2.5% COLA retirees just received is the lowest in four years. Here are the recent adjustments for context:

Data source: Social Security Administration.

Most seniors aren’t happy with the COLA

According to a recent Social Security COLA survey by The Motley Fool that asked 2,000 retirees about the COLA, 81% of retirees say that the 2025 COLA will not help them keep up with their essential living expenses. And it isn’t hard to see why.

Simply put, the expenses that affect seniors the most have increased at a faster pace than overall inflation. Healthcare expenses are the most obvious example, and medical care services have increased by 3.4% over the past year, according to the latest Consumer Price Index data. Another example is housing, which seniors spend more on as a percentage of income than the average household. Housing costs have outpaced inflation for several years and were up 4.6% year over year as of December 2024.

It’s not perfect

The Social Security COLA isn’t perfect. Not even close. However, Social Security is the only inflation-protected source of income that many retirees have, so the COLA is a valuable feature for millions of Americans.

It’s entirely possible that the way the COLA is calculated could change to the CPI-E in the future, and there have been legislative efforts to make it happen, although nothing has made serious progress yet. It is estimated that the CPI-E would increase the annual COLA by an average of 0.2 percentage points each year, which can really make a difference over the long run. https://www.ssa.gov/oact/solvency/provisions/cola.html

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