Social Security beneficiaries eagerly anticipate the yearly cost-of-living adjustment (COLA) as it increases their benefits. While the 2025 COLA is expected to be smaller than in 2024, with estimates suggesting a 2.5% raise, this isn’t necessarily bad news. Even though the 2024 COLA saw a 3.2% increase, a less robust 2025 adjustment doesn’t mean financial doom. In fact, there’s a positive side to this forecast.
COLA
Social Security’s annual COLA is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). This index tracks price changes for essential goods and services used by urban workers, like groceries, housing, and transportation. The CPI-W data for the third quarter of each year—July, August, and September—is used to calculate the next year’s COLA.
So far, the data from July and August suggests a modest 2.5% increase for 2025. While this is less than the previous year’s 3.2% increase, it’s important to remember that lower inflation means the cost of living is stabilizing. If September’s inflation doesn’t skyrocket, the final number will likely stay around 2.5%.
| Year | CPI-W Average | COLA (%) |
|---|---|---|
| 2024 | 3.2 | 3.2 |
| 2025 | 2.5 | 2.5* |
*Estimated based on July and August data.
Smaller COLA
At first glance, a lower COLA may seem like bad news. However, Social Security COLAs are designed to match inflation. So if the COLA is smaller, it’s because inflation is cooling, meaning prices aren’t rising as much as they were in previous years.
In other words, while a 2.5% raise may sound meager, it actually suggests that retirees won’t need as big of a raise to cover their living costs. This could provide them with more purchasing power than initially expected. The goal of the COLA is to help retirees maintain their standard of living, and if inflation slows, a smaller adjustment can still meet that goal.
Stable Economy
If the economy is stabilizing and inflation remains under control, retirees benefit. Even if Social Security benefits don’t jump as much as they have in previous years, flat or moderate inflation means the cost of goods like groceries and utilities won’t climb at a rapid pace either.
Imagine inflation remained flat for a year. If the CPI-W stayed exactly the same as the previous year, the COLA would be 0%. But that wouldn’t be a bad thing because prices wouldn’t be rising, meaning retirees wouldn’t need an increase to maintain their purchasing power.
The same logic applies to a 2.5% COLA. While the percentage may be smaller, it reflects a more stable economy. Seniors can rest easy knowing that their benefits are keeping up with the cost of living, even if the raise isn’t as large as they had hoped.
Income Sources
Regardless of COLA changes, it’s essential for retirees to have income streams beyond Social Security. COLA increases can vary year to year, and Social Security alone is rarely enough to replace a full income.
Social Security typically replaces about 40% of a worker’s pre-retirement income. This means there’s often a gap that needs to be filled. Whether it’s savings from a retirement account, income from a part-time job, or rental income, having additional sources of income can provide financial security. This way, whether the COLA is 2.5% or 5%, retirees can rely on more than just Social Security to maintain their lifestyle.
Benefits
There are strategies to increase Social Security benefits, such as delaying benefits past full retirement age. Every year you delay claiming benefits after reaching full retirement age, your monthly payments increase by about 8%.
Moreover, coordinating benefits with a spouse or ensuring you’re not missing out on survivor or spousal benefits could give you a substantial boost. Simple adjustments to when and how you claim can make a big difference in your retirement income, helping ensure that even during years with smaller COLA increases, you’re maximizing your financial situation.
While Social Security remains a cornerstone of retirement planning, it’s best to explore these options for the best financial results in retirement.
FAQs
When will the 2025 Social Security COLA be announced?
On October 10, 2024.
How is the Social Security COLA calculated?
It’s based on inflation, measured by the CPI-W.
Why is 2025’s COLA expected to be smaller than 2024’s?
Inflation has moderated, so less of an increase is needed.
Is a smaller COLA bad for retirees?
No, lower inflation means costs are stabilizing.
How can I increase my Social Security benefits?
Delaying benefits or coordinating with a spouse can boost your income.
