The cost-of-living adjustment estimate for older adults next year continues to shrink as inflation cools further, according to new calculations.

Based on August's consumer price index report on Wednesday, Social Security's cost-of-living-adjustment (COLA) in 2025 is forecast at 2.5%, lower than last month’s 2.6% estimate and below the 2024 increase of 3.2%, said Mary Johnson, an independent Social Security and Medicare policy analyst who tracks and calculates the COLA estimates. A 2.5% COLA would raise an average retiree benefit of $1,870 per month by about $46.80 (rounded to the nearest dime).

The increase will likely be insufficient to help retirees dig out of a financial hole as prices of goods and services that retirees spend most of their money on remain high, Johnson said.

“The 2025 COLA will be the lowest received by Social Security beneficiaries since 2021, at the same time inflated prices persist on key essentials such as housing, meats, auto insurance, any type of service and repairs,” she said.

The Census Bureau also reported on Tuesday that a larger percentage of seniors has been falling into poverty every year since 2020.

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More seniors in poverty

Annual COLAs are meant to help Social Security beneficiaries keep up with inflation, but they haven’t been, a study by The Senior Citizens League (TSCL) released in July showed.

Social Security benefits have lost 20% of their purchasing power since 2010 as the cost of items seniors most spend their money on rise faster than inflation, TSCL said. That means for every $100 a retired household spent on groceries in 2010, that household can only buy about $80 worth today, it said.

“On average, payments for retired workers would need to rise by $4,440 per year or $370 per month, to rebuild their lost value,” TSCL said.

Seniors (ages 65 and up) are also the only group that’s seen an annual increase in poverty since 2020, according to the Census Bureau’s supplemental poverty measure report released on Tuesday.  The supplemental measure includes cash and noncash benefits but subtracts necessary expenses such as taxes and medical expenses and accounts for geographic variations in housing expenses.

In 2023, 14.2% of seniors were in poverty, up from 14.1% the prior year, 10.7% in 2021 and 9.5% in 2020, the Census Bureau said. It’s also the highest percentage since 2016’s 14.5%.

Medicare Part B premium increases eat into COLA

Average monthly premiums for Medicare Part B, which covers medically necessary services and some preventive services like exams and lab tests, grew twice as fast as COLA over the past two decades, Johnson said.  Part B premiums increased on average by 5.5% per year, while COLAs averaged less than half that rate at just 2.6%, she said. COLA doesn't factor in Medicare Part B premium increases.  

The 2025 Medicare Part B premium will be announced in the fall, but it’s expected to cost $185 monthly, up from $174.70 this year, according to the 2024 Medicare Trustees Report. That would be a 5.9% jump and more than the estimated 2.5% COLA increase.

"When Part B premiums grow at a faster rate than Social Security COLAS, premium costs consume a growing portion of monthly Social Security checks," she said. The Part B premium, and any voluntary withholdings for taxes, are automatically deducted from the monthly benefit amount by the Social Security Administration.

Medicare provides health insurance coverage to 67.4 million Americans, with 89.5% of them ages 65 and older, Centers for Medicare and Medicaid Services said.

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How is COLA calculated?

The Social Security Administration bases its COLA each year on average annual increases in the consumer price index for urban wage earners and clerical workers (CPI-W) from July through September. That means those months' inflation numbers are especially important to pay attention to.

The index for urban wage earners largely reflects the broad index the Labor Department releases each month, although it sometimes differs slightly. Last month, the overall 12-month consumer price index rose 2.5% and the index for urban wage earners was up 2.4%.

However, Johnson notes “ironically (CPI-W), does not survey retired adults aged 62 and older, the very people the Social Security COLA is supposed to protect."

CPI-W looks at the price inflation experienced by working adults younger than 62, she said. The problem with that is younger working consumers spend their money differently than older people covered by Medicare. For example, economists estimate younger workers spend about 7% of their budget on healthcare costs, but research and surveys have indicated that older adults tend to spend on average 15% or more of their incomes on healthcare, she said.

What was 2024's COLA?

Older adults received a 3.2% bump in their Social Security checks at the beginning of the year to help recipients keep pace with inflation. That increased the average retiree benefit by $59 a month.

The Social Security Administration is expected to announce the 2025 COLA on October 10.

Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at [email protected] and  subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.