In October 2023, the Social Security Administration announced that the cost-of-living adjustment (COLA) for 2025 would be 2.5%.
This increase, while smaller than previous years, still plays an important role in helping Social Security beneficiaries cope with inflation.
Here, we break down what this smaller increase means, why it isn’t all bad, and how you can manage your finances in retirement.
What Is the COLA and Why Does It Matter?
The Cost-of-Living Adjustment (COLA) is an increase in Social Security payments aimed at keeping up with inflation. This helps ensure that your benefits don’t lose value as prices for goods and services rise.
In 2025, the COLA is set at 2.5%, which means Social Security payments will go up by this percentage. This may seem small compared to previous years, where increases were as high as 8.7% in 2023, but it’s important to look at the bigger picture.
Why a Smaller COLA Can Be a Good Thing
A smaller COLA increase, like the 2.5% in 2025, can actually be a sign of positive economic conditions. Typically, the COLA increase reflects how much inflation has grown.
If inflation is lower, as it seems to be for 2025, it means that costs are not rising as quickly, which can benefit you in the long run.
If prices for things like food and gas don’t increase too quickly, this means your money will stretch a little further.
Understanding the Purpose of COLAs
While many people look forward to large COLA increases to improve their financial situation, the main purpose of COLA is to protect your buying power.
It is not designed to make you richer but to keep your Social Security benefits from losing value due to inflation.
A lower COLA doesn’t mean you’re worse off—it just means inflation isn’t climbing as quickly, so your purchasing power remains steady.
Tips for Managing Finances During Low COLA Years
Even though the 2.5% COLA increase for 2025 might not feel like much, there are steps you can take to ensure your finances remain stable. Here are a few ideas:
- Work Part-Time: If you’re able, consider a part-time job to supplement your income. Social Security recipients can work while still receiving benefits, as long as they haven’t reached full retirement age.
- Cut Costs: You can reduce your expenses by moving to a less expensive area or downsizing to a smaller home. These steps will help you make your benefits last longer.
- Stay Informed: Know how much you’re receiving in Social Security and track your spending. This will help you adjust your budget as needed to stay on track financially.
While the 2.5% COLA increase for 2025 may feel underwhelming compared to previous years, it’s important to consider the broader economic context.
A smaller COLA often reflects lower inflation, which means things like groceries and gas may not rise as quickly.
Combine this knowledge with smart financial planning, like downsizing or finding extra income, and you can still stay financially secure in the coming year.
Why is the COLA increase only 2.5% in 2025?
The COLA is based on inflation. A smaller COLA means that inflation is not increasing as quickly, which can be a good thing for your purchasing power.
How does the COLA affect Social Security benefits?
COLA adjustments ensure that Social Security payments keep up with inflation, helping you maintain your buying power when prices rise.
Can I work and still receive Social Security benefits?
Yes, you can work and receive Social Security payments, but if you haven’t reached full retirement age, there are earnings limits to be aware of.
How can I make my Social Security benefits last longer?
You can move to a cheaper area, downsize your home, or find ways to earn extra income to stretch your benefits further.
Should I be worried about the 2.5% COLA increase?
No, a smaller COLA usually means inflation is under control. While it may feel like a small increase, it’s better than having inflation rise too quickly.
