A Lot Has Happened To Your Social Security Since The 2025 COLA Was Announced

Navigating Social Security can be stressful, even in more precedented times. But keeping a handle on the ways Social Security has changed since the start of 2025 might give retirees (and other Social Security beneficiaries) a few more gray hairs. Social Security is the largest federal program in the United States. In addition to retirement beneficiaries, those who receive disability insurance, survivors benefits, or relevant spousal benefits all fall under Social Security. So do those low-income beneficiaries who rely on Supplemental Security Income (SSI), another form of Social Security benefits. All to say: Many Americans stand to be impacted by changes to Social Security.

In addition to the three big planned changes for Social Security in 2025, there are plenty of fresh financial uncertainties to contend with in this not-so-precedented new year. And of course, none of these uncertainties or other rising costs have been accounted for in Social Security's already-calculated and already-announced 2025 COLA rate. However, this isn't because of any bad action on behalf of the Social Security Administration.

Each year, the SSA calculates its COLA, or cost-of-living-adjustment, using data gleaned from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The whole point of COLA is to make sure that the buying power of Social Security beneficiaries isn't outweighed by the fluctuating costs of goods and services. However, the spiking food and energy inflation that has already occurred since the 2025 COLA rate was announced in October 2024 has left Social Security's buying power in question.

The SSA uses the CPI-W as a general metric of how high inflation is, and sets its COLA percentage to account for it. By comparing the wages of average Americans via the national wage index, as well as how much consumer goods and services cost average Americans in a set time frame, the SSA can begin its COLA calculus. Using formulas and third-quarter inflation comparison across the previous two years, the SSA calculates its annual COLA increase. The 2025 COLA rate was set at the modest increase of 2.5%, meaning that inflation was not considered as much of an issue as it was during years when the COLA rate was much higher, such as over 8%. 

Basically, per CPI-W data, a lower calculated COLA should be a relative match for the national inflation rate. Per CPI data, the inflation rate from October 2023 from October 2024 increased at the moderate rate of 2.6%. Even in December 2024, inflation rates rose by smaller degrees than initially feared by economists. However, despite moderate changes to core inflation rates, the factors left out of these reports failed to convey the full financial story that consumers were actually living in.

The core inflation rate is calculated without accounting for the costs of certain key spending factors that those living on fixed incomes are most affected by: the cost of food and energy. Drastic shifts in the price points of pesky luxuries like groceries and gas might affect oh, say, every single American — especially those reliant on Social Security.

If the COLA is meant to reckon with inflation, any inflationary event affecting food and energy will make that COLA feel inadequate. Also, per January 2025 CPI data, inflation has been rising since the mid-October COLA announcement, leading to a COLA shortfall. While this discrepancy erodes much of the buying power of Social Security's benefits, inflationary events that affect the prices of food and gas further erode it, especially if such events occur just a few months after the COLA rate is announced. The new year has already been full of such events, and the year is still young.

As anyone who has considered a down payment on the increasing cost of a dozen eggs knows, the price of groceries is getting worse. So are rising oil and gas prices, driven by geopolitical tensions freshly stirred by the new presidential administration. While the financial impact of new tariffs might be increasingly felt at the pump for all Americans, it may cause those who rely on Social Security to run out of gas entirely.

As of 2023, 71.6 million Americans collected Social Security benefits. That means 1 in every 5 Americans rely on Social Security benefits in some way. When it comes to Americans aged 65 and up, about 4 in every 5 Americans count on Social Security benefits in retirement. In fact, 75% of Social Security beneficiaries are those receiving retirement benefits. For those beneficiaries and those close to them, balancing their budgets might be more important — and death-defying — now, than ever before.