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Inflation has more or less finally been tamed. That’s the main takeaway from Social Security’s 2025 cost-of-living adjustment, announced by the Social Security Administration earlier this month.
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Every year the SSA adjusts monthly Social Security payments to keep up with overall inflation. The agency makes this adjustment in the third quarter, announcing each the fall rate increases that will kick in the following January.
While inflation dropped to 2.4% in September, the SSA will increase payments by 2.5% in 2025. For example, for every $100 a retiree received in 2024 they will receive $102.50 in 2025.
The rate increase will bump the average Social Security retirement benefit from $1,873 per month (as of September 2024) to $1,919 in 2025. (Although readers should note that average Social Security benefits may also fluctuate due to a variety of external circumstances.) For most retirees, this increase will begin with their first benefits payment in January 2025. For SSI recipients, this increase will begin with their last payment in December 2024.
The rate increase will coincide with the SSA’s annual income cap increase. Effective January 2025, earnings of up to $176,100 will be subject to the Social Security tax. This is an annual increase, again, to keep up with inflation. As always, earnings above the cap are not subject to the Social Security tax, meaning that this tax effectively decreases with additional earnings.
Social Security benefits are increased based on the Consumer Price Index as calculated by the Bureau of Labor Statistics. Specifically, the SSA uses a figure known as the CPI-W (the Consumer Price Index for Urban Wage Earners and Clerical Workers). This is an inflation index that has more upward pressure, since it measures price changes in more expensive urban areas.
The purpose of this annual rate increase is to eliminate a form of longevity risk brought on by inflation. Inflation can erode the spending power of stagnant savings. Even at the Federal Reserve’s target rate of 2%, prices will double roughly every 35 years. For an ordinary retiree, without some offsetting increase, this means that a steady retirement income can effectively halve over the course of even a moderately long lifetime.
While inflation has been quite low for most of the 21st Century, recent years have reminded Americans that it can be very real. In 2021 and 2022, in fact, high inflation triggered some of the largest benefit increases ever. In those years, the SSA increased payments by 5.9% and 8.7%, respectively. In 2024, benefits rose just 3.2%.
