With another year in the books, Social Security retirees will look ahead to 2025. Retirees will receive a 2.5% cost-of-living adjustment (COLA), the smallest in four years because inflation declined this year. The average Social Security benefit for retired workers in November was roughly $1,925 per month, or $23,105 annually. The COLA increase will lift the average monthly benefit to roughly $1,974, or $23,683 annually. Now that retirees know their benefits for 2025, they can map out their budgets for the upcoming year and start thinking about future benefits. Here’s the one number Social Security retirees should pay attention to in 2025.

The 2026 COLA

2026 may seem far away, but the next year’s benefits are always determined the year before, specifically in the third quarter during July, August, and September. Social Security COLAs are intended to help retirees keep pace with inflation, so the Social Security Administration (SSA) uses inflation data from those three months to determine the following year’s COLA.

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The Consumer Price Index, which tracks the price changes on a basket of consumer goods and services, is the mainstream inflation gauge. However, the market focuses on the Consumer Price Index for All Urban Consumers (CPI-U), while the SSA uses the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to calculate the COLA. Some argue that the CPI-W doesn’t fully capture the spending habits of the mainly older population that claims benefits, but the SSA by law must use the CPI-W when calculating the new COLA. The CPI-U and CPI-W largely move in the same direction.

To calculate the following year’s COLA, the SSA looks at the year-over-year change in the CPI-W in the third quarter of the year; the agency takes the year-over-year change in July, August, and September and averages them together to arrive at the next year’s COLA. Retirees will want to pay attention to the CPI throughout the year to know how the 2026 COLA is shaping up. Early-year trends on inflation should offer clues as to how the CPI-W will trend later in the year.

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Inflation could go either way

The sooner retirees have a better idea of next year’s COLA, the sooner they can begin budgeting, whether that means saving a little extra each month if possible or realizing they may have a little extra cash to work with.

It’s hard to know exactly in which direction inflation will go, making this year particularly interesting. The CPI-W has risen about 2.7% in the first 11 months of 2024, compared to a 3.3% increase in all of 2023. While many think inflation will continue to come down toward the Federal Reserve’s preferred 2% target, others aren’t so sure. The labor market still looks strong and inflation has increased at a steady clip for most of the second half of the year. After the Fed’s final meeting of the year, Fed Chair Jerome Powell said the agency will proceed cautiously on future rate cuts, given inflation trends seen in recent months. Some worry that President-elect Donald Trump’s proposed policies like tax cuts and tariffs may re-ignite inflation, while others wonder if the Fed moved too early with rate cuts. Economists have recently hiked their estimates for inflation in 2025.

Higher inflation would likely lead to a higher COLA in 2026, but it’s a bit of a double-edged sword because higher inflation also means higher consumer prices. Various studies have shown that Social Security benefits have not kept pace with inflation, so some retirees may root for a smaller COLA if it means falling consumer prices. Consumer sentiment can also drive inflation because consumers may adjust their spending habits based on what they think will happen. That’s why the CPI-W merits attention next year.

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