The Social Security Administration released news on Thursday, Oct. 10, explaining that beneficiaries will receive a 2.5% cost-of-living adjustment (COLA) in 2025. That means the average monthly retired worker benefit will increase from $1,920 in August 2024 to $1,968 in January 2025. Retired workers haven’t received a smaller raise since 2021.

Unfortunately, there is more bad news. The Senior Citizens League, a nonpartisan advocacy group, estimates benefits have lost 20% of their purchasing power since 2010 because COLAs have failed to keep up with inflation. That pattern is set to continue next year.

Here are the important details.

Image source: Getty Images.

Social Security benefits will get a 2.5% cost-of-living adjustment (COLA) in 2025

Social Security’s cost-of-living adjustments are designed to protect the buying power of benefits by ensuring payments increase at the same pace as inflation. In this scenario, inflation is measured with a subset of the Consumer Price Index known as the CPI-W, which tracks price changes based on the purchase patterns of hourly wage earners and office workers.

The calculation is simple: The average CPI-W reading from the third quarter of the current year (July through September) is divided by the average CPI-W from the third quarter of the previous, and the percent increase becomes the COLA in the following year. The chart below provides details on the 2025 COLA calculation.

Data source: Bureau of Labor Statistics.

As shown above, the average CPI-W reading in the third quarter of 2025 was 308.729, which is 2.5% higher than the average CPI-W in the third quarter of 2024. So, Social Security benefits will get a 2.5% COLA in 2025.

The chart below shows how the 2.5% COLA will impact the average Social Security payout that different types of beneficiaries receive on a monthly basis.

Data source: The Social Security Administration. Monthly payment amounts have been rounded to the nearest dollar.

Social Security’s 2025 COLA comes with bad news for retired workers

Inflation has cooled from its post-pandemic peak, but many retired workers are still struggling with financial pressure related to elevated prices. Indeed, retirees listed inflation as their greatest financial concern in the Schroders 2024 U.S. Retirement Survey. Additionally, less than half of participants think they have enough money saved, and nearly half said their retirement expenses are higher than expected.

Unfortunately, those financial problems will likely get worse in the coming months because Social Security is set to lose buying power in 2025. Many experts believe the CPI-W is a poor gauge of pricing pressure for retired workers because it measures inflation based on the spending patterns of young, working-age adults. Those people tend to spend money differently than Social Security beneficiaries.

Most importantly, retirees generally spend more on housing and medical care, and less on food, education, and transportation, according to Alicia Munnell, director of the Center for Retirement Research at Boston College. That means the CPI-W understates the importance of housing and medical care from the perspective of retirees while overstating the importance of food, education, and transportation.

CPI-W inflation in the more-important spending categories has trended above average this year, while CPI-W inflation in the less-important spending categories has trended below average. That means CPI-W inflation is understating the extent to which rising prices have impacted retirees, which itself means Social Security will lose more buying power next year. In other words, even though beneficiaries will receive a 2.5% COLA, they may feel like they have a little less money in 2025.

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.