Why Your 2025 Social Security COLA Could Be the Biggest Increase You'll Get for Years to Come | The Motley Fool

In 2023, retirees received a Social Security increase of 8.7%. It was the largest annual cost-of-living adjustment (COLA) in four decades. The Social Security benefit increase fell sharply in 2024 to 3.2%.

Don't expect a major rebound next year -- or anytime soon, for that matter. Here's why your 2025 Social Security COLA could be the biggest increase you'll get for years to come.

Image source: Getty Images.

The latest 2025 Social Security COLA estimates

We won't know the actual Social Security COLA for next year until mid-October, after the release of inflation data for the third quarter. However, experts closely watch the monthly inflation numbers to get a feel for what the increase might be.

In April, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) rose 3.4%. Is that what the 2025 COLA is likely to be? Not according to The Senior Citizens League (TSCL), a nonprofit advocacy organization for seniors.

TSCL looks at the inflation trends rather than only one monthly data point. The organization now estimates the 2025 Social Security COLA will be 2.66%. Since the Social Security Administration always rounds to the nearest tenth of 1%, your increase based on how the numbers are trending will be 2.7%.

Mary Johnson, who retired from TSCL but still calculates her own COLA estimates, thinks the increase could be higher. She projects a 2025 COLA of 3.2% -- matching the increase retirees received this year.

Why Social Security Trustees predict lower COLAs

If Johnson is right, your next Social Security COLA could be the highest you'll get anytime soon. Why? The Social Security Trustees predict lower COLAs ahead.

The Social Security Trustees use three scenarios in their projections:

• A low-cost scenario that assumes higher fertility rates, immigration levels, wage growth, and interest rates along with slower growth in life expectancies.
• A high-cost scenario that assumes lower birth rates, immigration levels, wage growth, and interest rates along with more rapidly increasing life expectancies.
• An intermediate scenario that is in between these other two scenarios and is viewed as the most likely to occur.

Below are the Social Security Trustees' projections for COLAs through 2033:

Data source: 2024 Social Security Trustees Report.

What if we use TSCL's lower 2025 Social Security COLA estimate of 2.7%? It could still be the biggest increase you'll receive in a long time based on the Social Security Trustees' intermediate and high-cost scenarios.

This isn't surprising. So far in the 21st century, the annual COLA has been at or below 2.7% in 15 of 24 years. Retirees didn't receive an increase at all in three of those years. The high inflation and corresponding high COLAs of 2022 and 2023 are historical outliers.

Take these estimates with a grain of salt

So should you prepare for lower Social Security COLAs? Yes and no.

Take all of these estimates with a grain of salt (or better yet, a shaker of salt). The Social Security Trustees can't accurately predict economic conditions years in advance. It's possible that the actual COLAs between 2026 and 2033 will be much different than their projections. The 2025 COLA could also vary quite a bit from the 2.7% to 3.2% range currently predicted. No one knows what the inflation numbers will be in the third quarter of this year.

However, it's a good idea to carefully watch your spending rather than assume you'll receive a big benefit increase. That's especially true considering any COLA will be paid after you incur higher costs of goods and services. Whether it's high or low, the adjustment always lags behind the actual increase in the cost of living.