The cost-of-living adjustment, or COLA, means the average recipient will receive nearly $50 more every month beginning in January
Tens of millions of retirees will see a modest increase in benefits this January when a new cost-of-living adjustment is added to Social Security payments.
The 2.5% raise is an additional $561 in Social Security income over the course of the year intended to help meet higher prices for food, fuel, and other goods and services. That's a smaller percentage than last year, because consumer prices have eased, and the COLA is tied to the Bureau of Labor Statistics Consumer Price Index.
"The COLA is a vital component of Social Security, ensuring older Americans have an inflation protected source of income in retirement," AARP CEO Jo Ann Jenkins said in a statement. "This adjustment means older Americans will receive needed relief to help better afford essential items from groceries to gas."
Even with this adjustment, many older Americans may find it hard to pay their bills amid persistent higher prices, she said. For about 40% of older Americans, Social Security is their primary source of income, according to the AARP.
Before Thursday's announcement, retirees had voiced concern that the increase would not be enough to counter rising costs. Sherri Myers, an 82-year-old retiree from Pensacola City, Florida, is now hoping to get an hourly job at Walmart to help make ends meet.
"I would like to eat good but I can't. When I'm at the grocery store, I just walk past the vegetables because they are too expensive. I have to be very selective about what I eat -- even McDonald's is expensive," she said.
The Social Security program pays roughly $1.4 trillion in benefits to more than 71 million people each year, including including retirees and low-income individuals with disabilities.
The short answer is that taxes fund Social Security. The government uses taxes from working people to pay benefits to people who have already retired, people who are disabled, the survivors of workers who have died, and dependents of beneficiaries.
Social Security is financed by payroll taxes collected from workers and their employers and that is slated to increase to $176,100. The maximum amount of earnings subject to Social Security payroll taxes was $168,600 for 2024, up from $160,200 in 2023.
While the money is used to pay people currently receiving benefits, any unused money goes to the Social Security trust fund. Some of the money in the trust, together with the Social Security contributions of people in the workforce, pay for future benefits.
To determine what amount of Social Security you'll receive, the government calculates a percentage of your highest wages from your top 35 years of earning, factoring in when you choose to start receiving benefits.
Millions of Social Security recipients will get a 2.5% increase in their benefits in 2025. That's about $50 per month for the average recipient, according to government estimates.
The maximum benefit for a retired worker who claims at full retirement age will go up to $4,018 per month in 2025, up from $3,822 per month in 2024, according to the Social Security Administration. The average benefit for all retired workers will be $1,976 in 2025, up from $1,927 in 2024.
The agency will begin notifying recipients about their new benefit amount by mail starting in early December. Adjusted payments to nearly 7.5 million people receiving Supplemental Security Income will begin on December 31.
The COLA is calculated according to the Bureau of Labor Statistics' Consumer Price Index, but there are calls to use a different index -- one that measures price changes based on the spending patterns of the elderly -- like healthcare, food and medicine costs.
"Seniors tend to spend more on medical care in general, including some out-of-pocket expenses like prescription drug costs, that can be very significant," said Mark Hamrick, Senior Economic Analyst at Bankrate. "Of course, food, shelter, and energy costs are all still elevated. Those are things most people cannot go without."
Future problems with the fund have long been predicted, largely because of demographic shifts. As birthrates decline, fewer people become workers, which results in fewer payments of payroll taxes. Meanwhile, more Baby Boomers are retiring and collecting Social Security.
The annual Social Security and Medicare trustees report released in May said the program's trust fund will be unable to pay full benefits beginning in 2035. If the trust fund is depleted, the government will be able to pay only 83% of scheduled benefits, the report said.