2025 Social Security Benefits Increase by 2.5%

The Social Security Administration recently announced a 2.5% increase in retirement and disability benefits in order to offset the effects of rapidly rising inflation rates. It’s probably fair to say we’ve all heard the media buzz about inflation, and we’ve likely seen it at the gas pump, the grocery store, and other day-to-day expenses in our lives.

But what is inflation, and why is it so high right now? And how does it relate to the increase announced for Social Security retirement and disability benefits? Keep reading for a clear explanation of the complex factors behind inflation. We’ll also explain how the Social Security Administration is fighting its income effects on senior citizens, retirees, and other benefit recipients through this increase in monthly check amounts for those receiving Social Security benefits.

2025 Social Security 2.5% Increase

Important 2025 Social Security information is as follows:

NOTE: The 7.65% tax rate is the combined rate for Social Security and Medicare. The Social Security portion (OASDI) is 6.20% on earnings up to the applicable taxable maximum amount (see below). The Medicare portion (HI) is 1.45% on all earnings. Also, as of January 2013, individuals with earned income of more than $200,000 ($250,000 for married couples filing jointly) pay an additional 0.9 percent in Medicare taxes. The tax rates shown above do not include the 0.9 percent.

Historical Data

Here’s a look at the Cost of Living Adjustments (COLA) since 2020. It’s interesting to see how inflation has increased over time.

Common Causes of Current US Inflation

Skyrocketing inflation led to this historic Social Security increase. But what causes inflation in the first place?

1. Illness
2. Supply Shortages
3. Russia/Ukraine War
4. Higher Demand
5. Anticipated Price Increases

To put it simply, inflation is when money loses its purchasing power over time. Prices go up, and your money can buy fewer products and services. This primarily occurs when there is more money circulating in the overall economic market than there are goods and services – which means prices rise.

The value of money dramatically dropping is usually a response to the prices of goods and services dramatically and suddenly going up. The inflation rate represents how much the overall price of products and services increases within a given time period. The rate includes a wide range of goods and services considered necessary for an acceptable quality of life, then quantifies their inflated prices in a single-value percentage.

What Is COLA?

The Cost-of-Living Adjustment, or COLA, is an automatic cost of living increase in Social Security retirement benefits and Supplemental Security Income (SSI) benefits. This practice of making sure Social Security retirement benefits and Social Security disability benefits retain their buying power began in 1975 with legislation that aligned the Social Security COLA with the Consumer Price Index – so as the CPI rises, the COLA rises in equal measure.

This protection makes sure that Americans who are recipients of Social Security and/or Supplemental Security Income benefits are able to retain their buying power as consumer prices increase. The Social Security COLA is calculated each year and generally announced in October.

COLA increases are automatic for benefit recipients. Social Security beneficiaries do not have to ask the Social Security Administration or submit a new application to receive the COLA increase in their monthly check.

People receiving Social Security Disability Insurance (SSDI) benefits will begin seeing this increase in January of 2025, while recipients of Supplemental Security Income will see their first increased payment in December of 2024. Please note that Social Security COLA increases do not necessarily apply to disability back pay unless the COLA takes effect during the time period for which back pay is issued.

If you don’t see the increase in your Social Security benefits payments within the timeframes described here, it’s important to let the Social Security Administration know immediately so they can look into the discrepancy. And in the case of SSDI benefits, you may benefit from the expertise of a knowledgeable and qualified disability attorney.

What Is the Consumer Price Index?

The Consumer Price Index is considered the standard measure of inflation. It is calculated by the U.S. Bureau of Labor Statistics each month. The CPI measures how much consumers are currently paying for essential goods and services like gas, prescriptions, food, and school tuition to track how prices rise or fall over time. The BLS receives these spending data each month from more than 23,000 retail and service businesses.

Recent inflation data indicate that the Consumer Price Index rose to 2.5% over a 12-month period as of May 2024. That means that an item that cost $10 before the increase would now cost $10.25. And while that may not seem like a lot for an individual item, when compounded by similar increases across all goods and services, it can add up some painful stretching of paychecks and savings for many Americans, especially for retirees, senior citizens, and others on a fixed income.

The effects of current inflation can be seen clearly in two key areas – gas and groceries. The price of gas, when at its peak, had risen more than 50% over previous years, and grocery prices have increased significantly.

It’s important to keep in mind that inflation is a normal part of our economic system, and typically hovers around 2%. That means that your money loses value each year unless you have it invested at an interest rate higher than the inflation rate or you receive a pay raise each year that offsets the power of inflation. That’s exactly what the Social Security Administration is attempting to do with the 2.5% COLA increase that will take effect in 2025.

How Is COLA Calculated?

According to the Social Security Administration’s formula, each year’s COLA is calculated according to any increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). CPI-Ws are calculated on a monthly basis by the Bureau of Labor Statistics.

A COLA effective for December of a current year is equal to any percentage increase in the CPI-W from the third quarter average for the current year to the third quarter average for the most recent year in which a COLA became effective. Any increase must be rounded to the nearest tenth of a percentage. If, however, these calculations show no increase in the CPI-W, or if the rounded increase amounts to zero, then no COLA takes effect for that year.

5 Causes of Current US Inflation

Inflation is always complex, and the current state of inflation in the U.S. is influenced by several different factors, some of which we’ve listed below. Let’s take a more detailed look at some of the factors currently encouraging inflation across the U.S.

1. COVID-19

The COVID pandemic from 2020-2021 disrupted global supply chains, leading to shortages in goods and raw materials. Many businesses had to shut down and reduce production. As economies reopened, pent-up consumer demand outpaced the available supply, driving up prices. Governments around the world pumped large amounts of money into their economies to support businesses and workers, increasing the money supply. This also put upward pressure on prices.

Most people had less opportunity to spend that money during lockdown protocols, so much of it was saved – and when restrictions were lifted, people began spending more. This rush of spending led to supplies of goods and services that just couldn’t keep up, leading to higher prices in many spending categories.

The lingering effects of disrupted trade, combined with increased money supply, contribute to today’s inflation. While we’ve moved past the immediate crisis, its economic impact remains evident in 2025.

2. Supply Shortages

Supply shortages always drive up prices. When there aren’t enough goods so that everyone can purchase them, their value in the market increases, and consumers become forced to pay higher prices for those same goods. While demand for these goods and services may have remained steady, the supply chain, in many cases, has been compromised, which keeps manufacturers from being able to meet even typical demand.

Pandemics and war have contributed in a large way to supply shortages, by forcing many factories to shut down, which then led to many freight companies reducing their global shipping capabilities. In addition, truck drivers, seaport slots, and warehouse spaces are all currently in short supply, which results in expensive shipping delays and increasing rates for shipping goods. This type of effect is known as cost-push inflation – this occurs when the cost of wages and materials goes up. These costs then generally are passed on to consumers in the form of higher prices for goods and services.

For example, for many recent months, the price of new cars has trended upward by nearly 17% because of vehicle shortages – and these shortages largely have been driven by a lack of key components such as semiconductors. The decreased supply of that one key part has subsequently led to a steep drop in the supply of new vehicles overall, dramatically increasing their prices.

3. War

War in Ukraine and Gaza also play a substantial role in today’s inflation rates. The war effort tremendously stresses both fuel and food supplies, in particular. Ukraine is a leading producer and exporter of both grains and oilseeds, on which much of the global economic market depends.

To further complicate matters, Russia is the third-largest oil producer in the world. Both import bans on Russia and reduced agricultural production in Ukraine have led to rising inflation in other countries around the world because the supply of both commodities is dramatically strained. Inflation effects around the world include higher energy prices and reduced confidence in the economy and financial markets. This is complicated by the fact that the global economy already was suffering from pandemic-driven inflation.

4. Higher Demand

It’s a simple fact of human nature that when people have more money to spend, they will buy more things. This was certainly the case when the COVID-19 pandemic restrictions loosened. People were enthusiastic about buying goods and services at high levels since they had saved some of that extra money.

With higher demand always comes higher prices – because there aren’t enough goods to meet everyone’s demand, producers can drive up prices and many consumers are able to pay them because they have additional money. In addition, all consumers then have no choice but to pay higher prices for essential goods – like groceries and gasoline, for example. This kind of effect is known as demand-pull inflation, and it is the single most common factor that drives severe inflation.

5. Anticipated Price Increases

Much of what happens within the world market can be tied back to individual psychological states and decision-making. In the case of current inflation levels, the fact that most of us anticipate that prices will continue to rise also affects the market. When workers anticipate that prices are rising faster than their wages, they demand higher wages. Higher wages then increase production costs, which drive prices even higher for the consumer. This is known as built-in inflation and can result in a vicious wage-cost cycle that needs to be broken for inflation levels to stabilize.

What Is the Inflation Reduction Act?

The Inflation Reduction Act, signed into law in August of 2022, represents a significant effort on the part of the U.S. government to lower the costs of prescription drugs, overall health care, and energy costs. Notably, the act outlines a significant investment in taxing wealthy corporations.

Major provisions of the act include:

• Creation of a 15% corporate minimum tax rate for corporations with at least $1 billion in income
• Prescription drug price reform that allows Medicare to negotiate the prices of some prescription drugs
• $80 billion investment in IRS tax enforcement; an extension of Affordable Care Act (ACA) subsidies
• Significant investments in climate protection, including tax credits for households to offset energy costs, investments in clean energy production, and tax credits designed to help reduce carbon emissions.

By some estimates, this Act also is the most aggressive action toward addressing climate change in American history.

For retirees, senior citizens, and others on a fixed income, the effects of inflation can be especially painful. For example, whenever there is inflation, Medicare premiums rise. But with the Social Security Administration’s 2.5% COLA increase for benefit recipients, those who receive a monthly check from the Social Security Administration can regain their purchasing power through these challenging economic times.