The Social Security 2025 COLA is here, and there’s good news and bad news for retirees

Many retirees are looking forward to Social Security’s annual cost of living adjustment (COLA), which for 2025 is 2.5%. COLA technically goes into effect in December, with recipients seeing updated payments in January.

The average retired worker collects about $1,925 a month from Social Security, so the 2.5% COLA would equate to a monthly raise of about $48. However, there is good news and not so good news about what COLA means for your future benefits.

The good news about a smaller COLA

This year’s COLA of 2.5% is the lowest since 2021, and it’s significantly less than the 5.9% and 8.7% increases we saw in 2022 and 2023, respectively. So for many retirees, this adjustment is a bit of a disappointment.

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However, remember that COLA is directly linked to changes in inflation. The adjustment is based on changes in the Consumer Price Index for Urban Wage Earners and Office Workers (CPI-W) – which tracks the cost of common goods and services. The Social Security Administration takes an average of the third quarter’s CPI-W values ​​and then compares that number to the average from the same time period the previous year.

If the average is higher, the percentage difference will be the COLA for the next year. So in July, August, and September 2024, the CPI-W average was 2.5% higher than in the same months in 2023, giving us a 2.5% COLA for 2025.

Meanwhile, back in 2022, the CPI-W average was a whopping 8.7% higher than the previous year, reflecting record inflation rates. Although the COLA increased the average Social Security benefit the following year, it was not necessarily a good thing.

A smaller COLA may sting in the short term, but it also suggests that inflation is slowing. For most retirees, lower costs overall will have a greater effect than a slightly larger COLA.

The not-so-good news about the future

Inflation has slowed significantly over the past few years, but historically Social Security has still failed to keep up with rising costs.

In fact, Social Security has lost a whopping 20% ​​of its purchasing power since 2010 alone, according to an ongoing study by the nonprofit advocacy group The Senior Citizens League.

The study also revealed that since 2017, there have only been two years in which the COLA actually managed to keep pace with inflation. One of those years was 2023, which saw the highest adjustment in four decades. Even the 5.9% COLA in 2022 could not match actual inflation of 7% for the year.

In theory, smaller COLAs are a good sign that inflation is cooling. But in reality, most adjustments cannot keep up with inflation as it is. As a result, the benefits don’t go nearly as far as they did even a decade or two ago.

What you can do to protect your benefits

You may not be able to control COLA or inflation, but you can take steps to help your money last as long as possible in retirement. If you have savings beyond Social Security, expect that you may have to rely more on them if your benefits continue to lose purchasing power.

If you can swing it, you can even choose to pick up some part-time work or add a source of passive income. Anything you can do to reduce your reliance on Social Security can help protect your finances if the program becomes less reliable in the future.

If nothing else, it’s wise to stay informed about how far Social Security can realistically go. By taking steps now to prepare for potentially losing more purchasing power, you can better protect your finances no matter what happens in the future.