2025 Cost of Living Adjustment Projected at 2.57%

The Senior Citizens League (TSCL) estimates there will be a substantially lower cost-of-living-adjustment (COLA) for next year after the implementation of the 3.2% COLA in 2024.

“The 2025 COLA prediction is about 2.57%, down from 2.63% last month,” said Alex Moore, TSCL statistician and managing partner at Blacksmith Professional Services. "Third-quarter numbers are very important because that's what's compared to the prior year's quarter to get the COLA."

The rate of inflation, as measured by the Consumer Price Index used to calculate the Social Security COLA, fell to 2.9% for July, down from 3% in June.

This comes after another quarter of relatively high federal reserve interest rates (5.33% as of July). The Federal Reserve Interest Rate is one of the government’s key tools to tackle inflation.

Federal Reserve interest rates are important for Social Security because they are valuable for predicting COLAs. The metric is the interest rate at which depository institutions, such as consumer banks, hold trade balances at federal reserve banks overnight.

The Federal Reserve tends to increase rates to dampen inflation and lower them to encourage greater economic activity.

TSCL research has found that the Federal Reserve interest rate is able to explain about 23% of the COLA’s variance.

On average, for every one percentage point increase in the federal funds effective rate compared to the previous year, the following year’s COLA rises about .82 percentage points. In short, since both interest rates and COLAs tend to rise in reaction to higher-than-expected inflation, climbing interest rates can help predict the COLA.