One of the key features of Social Security is the annual cost-of-living adjustment (COLA), designed to help retirees keep pace with inflation.
As prices have soared in recent years, these annual raises have been a lifeline for many. In October, the Social Security Administration (SSA) announces the new COLA, revealing how much more seniors will receive the following year.
For 2025, the COLA will be 2.5%, which is a significant drop compared to the higher increases seen in the past three years. While some retirees may be disappointed by the modest raise, it’s important to take a step back and look at the broader context.
Let’s explore how the 2025 COLA compares to previous years and what it means for those receiving Social Security benefits.
How Does the 2025 COLA Stack Up?
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Looking at Social Security COLAs over the past 25 years, the 2025 adjustment of 2.5% is actually quite average. It ranks as the 12th highest since 2001 and sits just below the 25-year average of 2.58%.
The recent COLAs for 2022 and 2023 were much higher due to the extreme inflation seen in 2021 and 2022, so the 2025 adjustment may seem smaller in comparison. However, it’s in line with historical trends.
Many retirees may feel that costs are still high, even with this increase. This is partly because the SSA calculates the COLA using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which doesn’t necessarily reflect the spending habits of older adults.
Some have argued that the SSA should instead use the Consumer Price Index for the Elderly (CPI-E), which is more in tune with seniors’ typical expenses. Had the CPI-E been used, the COLA for 2025 would be 3.0%, and retirees would have seen a slightly higher adjustment.
The Hidden Benefit of an Average COLA
While the 2025 COLA may not be as large as recent increases, there are some silver linings to consider. One key benefit is that low inflation helps protect the overall value of your retirement savings.
Social Security benefits are tied to inflation, but other retirement savings, like investments, typically aren’t. In a low-inflation environment, the purchasing power of your portfolio often remains stronger.
For example, in 2023, the S&P 500 saw a significant 24% gain, with further growth in 2024. These stock market gains mean that the value of your retirement investments is likely much higher than just a few years ago.
Plus, if inflation remains low, you won’t need as much income to cover your retirement expenses, which can reduce the strain on your savings.
Additionally, low inflation is especially helpful in years when the market isn’t doing as well. If you follow a fixed withdrawal rate, such as the 4% rule, lower inflation means you won’t need to increase your withdrawals as much, helping your savings last longer.
| Rank | Year | COLA |
|---|---|---|
| 1 | 2023 | 8.7% |
| 2 | 2022 | 5.9% |
| 3 | 2009 | 5.8% |
| 4 | 2006 | 4.1% |
| 5 | 2012 | 3.6% |
| 6 | 2001 | 3.5% |
| 7 | 2007 | 3.3% |
| 8 | 2024 | 3.2% |
| 9 | 2019 | 2.8% |
| 10 | 2005 | 2.7% |
| 11 | 2002 | 2.6% |
| 12 | 2025 | 2.5% |
| 13 | 2008 | 2.3% |
| 14 | 2004 | 2.1% |
| 15 | 2018 | 2.0% |
| 16 | 2013 | 1.7% |
| 17 | 2015 | 1.7% |
| 18 | 2020 | 1.6% |
| 19 | 2014 | 1.5% |
| 20 | 2003 | 1.4% |
| 21 | 2021 | 1.3% |
| 22 | 2017 | 0.3% |
| 23 | 2010 | 0% |
| 24 | 2011 | 0% |
| 25 | 2016 | 0% |
A Potential Tax Advantage
Another benefit of a modest COLA is that it can help reduce the amount of taxes you owe during retirement. The income thresholds that determine whether your Social Security benefits are taxed don’t adjust for inflation.
So, if you receive a smaller raise, you might avoid crossing into a higher tax bracket, leaving more money in your pocket or for your heirs.
The Bigger Picture
When you take a step back, the 2025 Social Security COLA isn’t as small as it might seem. It’s a typical adjustment by historical standards, and low inflation brings its own advantages, especially for your retirement savings and taxes.
While it’s understandable to wish for a larger raise, this year’s adjustment could offer more stability and long-term benefits than you might expect.
If you want to make the most of your Social Security benefits, there are also strategies you can use to maximize your payouts. Even small adjustments to when you start receiving benefits or how you structure your retirement income can make a big difference.
And with a little planning, you can retire with confidence, knowing your financial future is secure.