Many retirees receive most or all of their retirement income from Social Security, which is why the program’s annual cost-of-living adjustments (COLAs) are extremely important.

The purpose of the Social Security COLA is to ensure that benefits keep pace with inflation. And these COLAs are calculated based on inflation data—specifically from the third quarter of the year.

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From what we know so far, Social Security’s COLA in 2025 is expected to be less than the raise retirees received in early 2024. But there is some very positive news hidden in this forecast.

How Social Security COLAs are calculated

Social Security COLAs are directly tied to the increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). If the CPI-W increases in the third quarter of the year compared to the previous year, Social Security benefits increase. If there is no increase or a decrease, Social Security benefits stay the same. They cannot decrease from one year to the next.

It is worth noting that some senior advocates believe that the CPI-W is not a good way to measure Social Security COLAs. An alternative measure has been proposed for this purpose – the CPI-E, or Consumer Price Index for Seniors.

Such an index could more accurately reflect the costs incurred by welfare recipients, as these can differ significantly from those incurred by office workers and urban wage earners. And we shouldn’t sugarcoat the “urban” part either. Not all retirees live in urban areas, and many deliberately avoid them to keep their living costs low.

But let’s get back to the CPI-W. Based on early inflation data, the current estimate of the Social Security COLA for 2025 is 2.63%. That’s below the 3.2% increase retirees received in early 2024.

However, a COLA of 2.63% is by no means the lowest number ever recorded. And that number is subject to change, as we are only halfway through the third quarter and don’t yet know what inflation has in store for us.

But the main reason for the good news on the Social Security COLA is that a smaller increase indicates falling inflation. Seniors are paying less now for things like groceries, utilities, and gas. If that trend continues, seniors could still benefit financially even if the COLA isn’t as generous in 2025.

Benefits for welfare recipients rose by 3.2% at the beginning of the current year. But if inflation already This means that seniors now experience some relief.

We have to wait and see

The Social Security Administration will not announce the COLA for 2025 until October. Until then, retirees will have to wait and be patient.

But even if the COLA next year isn’t as high as it will be in 2024, that’s not necessarily a bad thing. In fact, it’s quite reasonable to portray this as a good thing, since cooling inflation will have a positive impact on seniors’ daily purchases.