Last month, the Social Security Administration announced that beneficiaries would receive a 2.5% cost of living adjustment (COLA) in 2025. This revelation disappointed many Social Security beneficiaries. In fact, a recent investigation by The Motley Fool found that 54% of retirees think that the 2025 COLA is insufficient.

However, it may be helpful for Social Security beneficiaries to know exactly how COLAs are calculated. Understanding the process can make the outcome more relevant. It might also help some retirees think of the COLA in terms of dollars rather than percentage points. In this context, some people will benefit from an above-average increase in their benefits next year.

Read on to find out more.

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How exactly are Social Security cost-of-living adjustments (COLAs) calculated?

Social Security Annual cost of living adjustments (COLA) protect the purchasing power of benefits against inflation, as measured by a subset of the Consumer Price Index known as CPI-W. Here’s how the process works:

1. The Bureau of Labor Statistics reports monthly CPI-W readings, which reflect spending trends in eight major product groups.
2. The Social Security Administration averages monthly CPI-W readings from the third quarter (July through September).
3. The CPI-W for the third quarter of the current year is divided by the same figure from the previous year, and the percentage increase becomes the COLA for the next year.

Here’s the big picture: While the 2.5% COLA in 2025 is the smallest increase in Social Security benefits in four years – 3.2% in 2024, 8.7% in 2023 and 5.9% in 2022 – this means that prices across the economy are increasing. at their slowest pace in four years.

Better yet, CPI-W inflation continues to decelerate. It fell to 2.4% in October, below the third quarter average of 2.5%. If this continues, Social Security benefits will lose their purchasing power less quickly next year, and some retirees may find the COLA more sufficient than they initially expected.

Some Social Security retirees will receive a higher-than-average COLA in 2025

All retirees on Social Security will receive the same 2.5% cost-of-living adjustment next year. But what that 2.5% benefit increase represents in real dollars will vary from person to person based on their current payment amount. For example, the Social Security Administration estimates that the average monthly benefit for retirees will increase from $1,927 to $1,976 after COLA 2025. This means that the average retiree will receive $49 more per month in benefits next year.

According to the information, retired workers who currently receive more than $1,927 a month from Social Security will also receive a higher-than-average cost-of-living adjustment next year, measured in absolute dollars. At the extreme, someone who currently receives the highest possible payment of $4,873 per month will receive $122 more per month next year, so that their updated benefit equals $4,995 per month.

Retirees unhappy with COLA 2025 should consider these additional sources of income

Certainly, the two points I have made so far will not help those who are struggling to make ends meet. For retired workers in this situation, earning extra income is a smart way to supplement the relatively modest cost of living adjustment expected in 2025.

Fortunately, interest rates are high, making high yield savings accounts And certificates of deposit look attractive. Additionally, enthusiasm for artificial intelligence has caused the stock market to rise at a rapid pace, and all three main American stock indices are two percentage points away from their records. This makes the present a reasonable time to sell stocks.