Social Security is arguably the most far-reaching and consequential social program ever created. In 2024, 68 million Americans are expected to receive Social Security benefits.

More than one-third of beneficiaries have reported receiving over half of their income from Social Security, according to the Social Security Administration (SSA). That’s why the annual cost-of-living adjustment (COLA) to benefits is so important for this large cohort of Americans. It helps retirees maintain purchasing power and map their budgets for the following year.

Tomorrow is the last piece of the puzzle for calculating the 2025 COLA, and likely the biggest day of the year for retirees. Here is what you need to know.

New inflation data holds the key

The COLA is supposed to help retirees’ benefits keep pace with inflation. The SSA therefore calculates the COLA using inflation data.

The SSA uses data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which tracks the price changes on a market basket of goods and services. Keep in mind that the CPI-W is different from the Consumer Price Index for All Urban Consumers (CPI-U), the index that the broader market tends to reference when referring to inflation.

More specifically, the SSA looks at the CPI-W during the third quarter of the year in July, August, and September. The agency compares the year-over-year change in each month and then takes an average of those numbers to calculate the COLA for the following year. We already know the monthly changes for July and August, which is why tomorrow is such a big day. The U.S. Bureau of Labor Statistics (BLS) will publish the CPI-W for September, and then the SSA will calculate the 2025 COLA.

The CPI-W increased 2.87% in July and 2.35% in August year over year, averaging out to 2.61%. And most economists, as well as the Federal Reserve, expect inflation to continue to slow. If you look at monthly changes, the CPI-W has slowed dramatically this year although not always in a linear fashion. This means the COLA in 2025 is likely to be one of the smallest in four years.

How will that impact average Social Security benefits? Well, according to the SSA, the average monthly benefit for retirees in August came in at $1,920.48, or approximately $23,046 annually. The nonpartisan Senior Citizens League on Sept. 11 estimated that the 2025 COLA will be 2.5%. If we use that number, the average monthly benefit would increase to $1,968.49, or roughly $23,622 annually.

Where to look

The Bureau of Labor Statistics publishes the CPI-U at 8:30 a.m. ET, so I would expect the department to post the CPI-W at a similar time or not too long after that here. Then the SSA will publish the 2025 COLA on its website sometime tomorrow. Here is likely a good place to check. Plenty of financial sites, including The Motley Fool, will be reporting on the new COLA tomorrow.

While a smaller COLA than in recent years can be frustrating for retirees, the bigger-than-normal COLAs in recent years are because of higher-than-normal inflation, which has driven up the cost of living dramatically since the start of the pandemic in 2020. Social Security benefits have also lost purchasing power since the turn of the century.

But ideally, lower inflation should start to make the cost of living more affordable over time, and that is definitely a welcome change from years past.

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