The Bureau of Labor Statistics (BLS) just released the second of three data points that will determine how much more retirees will receive in Social Security retirement benefits next year.

Social Security’s annual cost-of-living adjustment (COLA) is an important part of the program. Many retirees rely on the annual increase in benefits to make ends meet and cover the rising costs of daily living. Last year, Social Security increased its benefits by 3.2%.

Retirees may be disappointed that this year’s COLA will be slightly lower than last year. The Social Security Administration uses the year-over-year change in the average inflation rate in the third quarter to determine next year’s adjustment. In the first two months of the quarter, average inflation rose just 2.6%. But September’s year-over-year increase could be less than that number, pushing the 2025 COLA even lower.

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The details of the 2025 Social Security COLA

As mentioned, each year’s COLA is determined by the average increase in inflation during the third quarter. Specifically, the Social Security Administration uses a metric called the CPI-W, which measures the increased cost of living for urban wage earners and office workers.

The formula is simple: Take the average CPI-W reading for the months of July, August and September and divide that number by the average CPI-W reading for the same months the previous year. The readings are usually released in the middle of the second week of each month. The BLS just released the data for August, and here’s how it stands.

Data source: Social Security Administration and Bureau of Labor Statistics.

As mentioned, the average annual increase in the CPI-W was 2.6% in the first two months of the quarter. However, a sharp monthly increase of 0.2% in the reading last September will likely mean a smaller annual increase in the reading for this September. Even with a similar monthly increase to last year, the quarterly average COLA is only 2.5%.

At this point, it’s very likely that retirees will see a 2.5% COLA next year. The Senior Citizens League updated its forecast with the same number. However, we won’t know for sure until October 10, when the BLS releases the September CPI-W reading. Any number between 308.662 and 309.610 results in a 2.5% COLA due to rounding.

The COLA 2025 will make many pensioners worse off

If the numbers come out as expected, a 2.5% COLA would mean a $48 increase in monthly benefits for the average retiree. That’s based on the $1,920 average pension the Social Security Administration paid out last month.

Importantly, Social Security benefit recipients likely won’t see this entire $48 increase in their monthly checks. That’s because the Social Security Administration may withhold part of your benefits to pay taxes or Medicare Part B premiums.

Many retirees must accept that an increasing portion of their Social Security benefits will be subject to income taxes each year. That’s because the income limits that determine what percentage of benefits are taxable haven’t been adjusted for inflation in more than 30 years. As a result, taxes could reduce the increase in your monthly benefit check.

In addition, the increase in Medicare premiums could be a rude awakening for many. The Medicare Board of Trustees estimates that Part B premiums could rise by $10.30 to $185 per month in 2025. That will eat up over 20% of the average monthly benefit increase. Medicare premiums for 2025 won’t be announced until mid-October.

The rising cost of Medicare is a significant challenge for retirees. For many, the actual cost of living is rising faster than Social Security COLA contributions. Medical costs make up a large portion of retirees’ budgets and are rising faster than average inflation. Housing is another large budget item for many, and housing’s share of inflation is also rising faster than the overall average. As a result, many retirees are forced to cut their budgets because their Social Security checks are not enough to cover their basic needs.

The good news for seniors is that the economy is showing signs of returning to slow and steady inflation. Historically, low and stable inflation has led to an increase in the purchasing power of Social Security checks. Unfortunately, it looks like retirees will have to wait until at least 2026 to get some relief.