Social Security is a social insurance program where contributions are made through payroll tax. It was enacted in 1935 amid the Great Depression to offer financial boosts to the aged. The term “Primary Insurance Amount” or “PIA” typically refers to how much people would receive if they got Social Security at full retirement age. People who retire early and qualify for Social Security before full retirement age may be eligible for reduced benefits. In addition to receiving Social Security (for which they paid in), people on the program are also eligible for cost-of-living benefit increases starting with the year they turn 62. Cost-of-living benefits are adjusted yearly to reflect the increase in living expenses. Read on to learn more.
The inflation game
In economics, inflation is an increase in the average price of goods and services. Inflation is particularly hard hitting for the senior population because it does two main things. One, it makes products and services they buy more expensive. Two, it reduces the purchasing power of the dollar. This unsavory inflation-related combination makes it harder for older individuals to maintain standards of living. Hence, SSA COLA (the Social Security Administration’s Cost-of-Living Adjustment) is the government’s response to inflation for people on Social Security. This annual increase in Social Security benefits is designed to soften the blow for Social Security and Supplemental Security Income (SSI) recipients during periods of inflation and beyond.
CPI-W
SSA COLA adjusts to reflect rising prices. This adjustment is based on the increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Since 1983, COLA continues to be calculated by comparing the CPI-W for the third quarter of the current year to the average CPI-W for the third quarter of the previous year. Note that is a measure of inflation calculated by the Bureau of Labor Statistics (BLS).
No action necessary
The Social Security Administration (SSA) announces the COLA in October each year, and the increase typically begins in January of the following year. It is not necessary for individuals to take action to receive it. Generally, senior citizens receiving Social Security benefits will automatically get the annual COLA benefit which the Social Security Administration adjusts each year. Seniors should watch out for COLA enrollment scams that trick seniors into divulging personal information or are designed to steal funds. Again, you do NOT need to enroll or pay to join.
Brief backstory
Social Security COLA is not brand new. These automatic yearly COLAs began in 1975 to deal with inflation that was high in the 1970s. Prior to that, it took a new act of Congress to increase Social Security benefits each time. However, no adjustments for inflation were made until 1950. Since COLA increases are designed to counteract fluctuating inflation, benefit amounts vary from year to year. There is no guarantee of an increase each year as it is dependent on the state of the economy. To demonstrate how COLAs can vary, compare 1980’s 14.3 % increase to 2010 & 2011’s zero %. A decrease in COLA typically indicates that inflation is under control. In periods of tough times for the economy, COLA continues to make a difference today by counteracting inflation, even by modest means, allowing people to maintain their purchasing power.
How COLA works
Per Investopedia, COLA prevents inflation from significantly eroding the value of Social Security benefits to retirees. The government steps in to adjust the amount of benefits. Here are examples based on actual COLA increases. The COLA was 3.2% for 2024. Someone who received $10,000 in Social Security benefits in 2023 would see their 2024 annual benefit income increase to $10,320. The COLA for 2025 is 2.5% on earnings that same person who received $10,320 in 2024 benefits would receive $10,578 in 2025.
Meager matters
For those on fixed incomes, even meager increases can help. Bankrate gives the following example of how small adjustments (using a 2.4 percent increase) can make a big difference in the value of a dollar over time. “Let’s say you retire today at age 62 with a $2,000 monthly benefit. With inflation at 2.4 percent, you’d need a monthly benefit of $2,658 to maintain your purchasing power when you hit 74 years old. Another 10 years and you’d need $3,370 each month to have the same purchasing power as when you first retired. So at age 84 without a COLA, your money wouldn’t go nearly as far as it did when you first started receiving benefits.”
Widespread benefits
SSA.gov shares that the 2.5 percent cost-of-living adjustment (COLA) covers nearly 68 million Social Security beneficiaries in 2025. The goal is keeping people on Social Security in step with inflation. Social Security typically notifies people about their new benefit amount by mail. Notices are also available in the Message Center of a person’s my Social Security account and provide exact dates and dollar amounts of new benefits and any deductions. Bear in mind that when inflation is down, recipients will likely not expect an increase the following year.
Disclosure: This article is purely informational and is not intended as a substitute for professional advice.
Looking at prices only can drastically understate the real inflation rate. For example, a refrigerator that the price doubles on, but only lasts 1/3 as long as the unit it replaces does not cost twice as much – it actually costs 6 times as much! The CPI completely fails to take into account the reduced lifespan of many of our consumer goods.
when I received mine my medicare increased the same amount, so I received ZERO increase.
This comment is purely informational and is not intended as a substitute for professional advice.
Don’t rely on the statist created SS benefits to live on.
It was created with full knowledge that it would be in affect only for a brief while when the end of life age expectancy was much lower.
You must save and invest to retire or you will not pull it off under just the SS benefits that will never equal what you contributed
I’m posting this again, as I posted it as a reply to Richard’s post, but not everyone reads replies and I wanted this to be read, because I really would like an answer to my last sentence. Someone, PLEASE answer it! Thank you! :-/
EXACTLY, Richard! We end up in the negative each year! How stupid do they think we are? In 2024, the Medicare Part B taken from my social INsecurity was $174.70. In 2025 it’s $185.00. That’s an increase of $10.30 MONTHLY!
The annual deductible for Medicare in 2024 was $240.00. It’s $257.00 in 2025, an increase of $17.00 MONTHLY! Now that is $27.30 monthly between those two increases.
My Medigap supplement went up $33.03 per month! The dental plan is up $8+ per month. I think the vision plan is the same.
Not to mention our electric and gas company who raised the rates 5 TIMES within the last year!! The water company rates – through the roof! Garbage rates are raised every year. And don’t get me started about grocery prices!!
OH, might I mention INSURANCE PREMIUMS??? TALK ABOUT GETTING RAPED WITHOUT BEING KISSED!! My homeowners, up $200- $300 almost every year these past 4 years! My auto insurance is up over $200 EVERY 6 MONTHS this last year!
Ok, here’s the clincher! …And what was my social INsecurity monthly raise this year?
Let’s see … a WHOPPING $41.00 PER MONTH!!!
Now, I admit, math was NOT my best subject in school, but can someone who IS a math aficionado, PLEASE tell me how this equates to the “cost of living?”
I wish an explanation of what items are included in the calculation of the Cola. I’m pretty sure that increases in food, energy and other everyday expenses for seniors are not included in the inflation rate calculation. .
Every time I get COLA increase, the about they take out for medicare increases. Many times that is more than the COLA increase. Sop it doesn’t always help us.
Social Security is not a savings account it is a Social System. You get back far less than you pay in.
If you made a yearly deposited of $1,000 into an account that paid 4% compound interest per year. When you reached age 70 you would have accumulated $182,845 in that account. At that point the account would be earning $7,313.80 interest per year.
AS to the ancillary benefits you get from Social Security: In the above example when you reach age 34 your account is earning about 1,025 in interest per year.
You can easily verify the above in a spreadsheet.
All the above shows is that the Feds should have privatized Social Security back when Ronald Reagan was president.
SSI is great for those of us who also were able to work for a company who offered a pension and health ins.. But retirees now in many cases do not get a pension. Some workers also can not get group health insurance and spend a lot on prescriptions co-pays and healthcare. needs. Much depends on how long we live as some people think they have a right to receive SSI because they paid into it, but I am sure that I , at 90 will receive more than I ever could have paid in , even though I did pay in from age 17 until 70. But without the benefits of group health ins. and Medicare it could be a struggle to keep up with the cost of yearly doctor visits and tests. . This article reminded me of exactly what each part of SSI means . Thanks
If only our government would evaluate inflation levels more accurately by using the methodology that existed during the Reagan Era. True inflation is more like 13% and everyone that doesn’t have a hired shopper like our government leaders enjoy realize this and just have to sadly laugh at the percentages finagled nowadays.
But what the heck, we just got to enjoy watching President Trump, at taxpayer expense show off one of several golfing establishments he owns in Europe.
Ain’t life grand?