The Social Security Administration finally gave more information about the cost-of-living adjustment (COLA) for 2025 on October 10. They said that payments would go up by 2.5% that year. This rise is in line with what was expected, but some people may be disappointed, especially after seeing the COLAs from the last few years.
The amount of money people got from Social Security went up by 3.2% in 2024 and an even bigger 8.7% in 2023. With these numbers in mind, the new 2.5% rise may not seem like much, and it’s easy to feel let down when looking at this percentage by itself. Even though people were disappointed at first, the 2.5% change for 2025 is not always a bad thing, and there’s a good reason for that.
Why a Smaller COLA Isn’t All Bad
It makes sense for people who get Social Security to want a big increase in their payments. But it’s important to remember that inflation rates have a direct effect on the size of the COLA. If the COLA is lower, like 2.5%, it means that inflation is not growing as quickly as it did in the past. This means that the cost of living is leveling off.
Indeed, benefits are only going up by 2.5%, but if prices for things like food and gas stay the same or slowly rise, seniors may be able to keep or even slightly increase their buying power. That is, a higher COLA for 2025 might not necessarily be better for the economy, since it would mean that inflation is rising faster.
The Role of Social Security COLAs in Retirement Finances
Some people who get Social Security may be disappointed by smaller COLAs because they expect these annual increases to make their general financial situation better. However, this is not the main reason why COLAs exist.
The only purpose of the COLA is to keep people who get it from losing buying power when prices go up. The price hikes protect Social Security payments from losing value due to rising prices of goods and services. But they aren’t meant to make a big difference in a retiree’s cash situation.
Social Security COLAs aren’t the only way to improve your finances in retirement. You may need to look into other options as well. There are, thankfully, ways to make more money or get more out of what you have.
For example, working part-time or in the “gig economy” are ways to make extra money, and people who get Social Security payments can work while still getting benefits. But if you haven’t hit full retirement age yet, it’s important to know the program’s earnings-test limits. If you go over those limits, your benefits could be temporarily cut off.
There are smart things you can do in addition to making more money to get the most out of your Social Security checks. There are two ways to make your benefits last longer: move to an area with a lower cost of living or downsize to a cheaper home. By lowering your regular costs, these steps can help make up for any shortfall you might feel because of a lower COLA.
Don’t be upset about the 2.5% COLA; instead, think about it in the bigger picture of inflation and living costs. A smaller change means that prices won’t go up as quickly as they did in the past, which could be seen as a good thing.
You can still stay financially stable in the coming year if you combine this outlook with proactive steps to handle your money, like making more money or cutting back on spending.
Finally, the amount of the COLA in 2025 shouldn’t be the only thing that affects your plans for retirement finances. Even though the raise seems small, you can feel more confident about the coming year if you know what your budget is for and make smart choices about it.
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