Each year, in the United States Social Security retirees look forward to the announcement of the cost-of-living adjustment (COLA), which keeps their benefits aligned with inflation. For 2025, the Social Security Administration (SSA) has confirmed that the COLA will be 2.5%. While this figure may seem low compared to the substantial increases in previous years-3.2% in 2024 and 8.7% in 2023-it is not necessarily bad news.
Understanding the relationship between COLA and inflation helps contextualize why a smaller adjustment could have positive effects. This 2.5% increase is aligned with stabilizing prices in the economy, which could reflect a downward trend in essential living costs, something beneficiaries should take into account when assessing how this increase impacts their day-to-day finances.
Why a smaller COLA is not such a bad thing
Social Security’s cost-of-living adjustment (COLA) is designed to reflect inflation, so when prices rise, so do benefits. A 2.5% increase for 2025 may seem low compared to increases in previous years, but it may actually signal something positive. This moderate increase is an indication that inflation is under control, meaning that prices of essential goods, such as food and gasoline, are not increasing as fast.
A smaller COLA could have positive effects, as it indicates that living costs are not rising at a breakneck pace, which could help beneficiaries maintain greater purchasing power. Rather than viewing the adjustment as a loss, it is useful to interpret it as a sign of economic stability, where the rise in prices is not as steep, allowing retirees to better manage their resources.
For example, a larger COLA might appear beneficial in the short term, but it would reflect higher inflation and rising asset costs. If prices rise at an accelerated rate, retirees would be worse off, even with a larger COLA. So, in summary, the 2.5% increase in 2025 might actually prove more advantageous in the long run, as it reflects a more stable economic environment.
What this means for your retirement finances
The purpose of Social Security COLAs is to prevent retirees from losing purchasing power due to inflation, not to significantly improve their financial situation. In fact, many retirees may find that the small increase is not enough to make a significant difference in their day-to-day expenses. This can be frustrating for those who rely on these benefits, but it is important to remember that the COLA seeks to maintain stability, not provide a significant increase in income.
If you want to improve your financial situation, it will be necessary to take other steps. One option is to join the temporary job economy, which will allow you to generate additional income. Another alternative is to get a part-time job, although you will need to be mindful of income limits if you have not yet reached full retirement age. In addition, making lifestyle adjustments, such as moving to more affordable housing or relocating to a region with lower living costs, can help you stretch your Social Security check even further.
Needy retirees can also apply for additional checks such as Supplemental Security Income or SNAP Food Stamps. In addition, controlling your monthly expenses is also a key to having a balanced economy in retirement. Remember that Social Security cannot increase once we start collecting it, but the COLA does balance the scales with respect to inflation, at least partially.