Disappointed in Your 2025 Social Security COLA? Here's Why You Shouldn't Be.

On Oct. 10, the Social Security Administration (SSA) dropped a bombshell by announcing that monthly benefits would be rising by 2.5% in 2025. That's a considerably lower cost-of-living adjustment, or COLA, than 2024's 3.2% increase. And it's also the smallest Social Security COLA to arrive since 2021 when benefits rose by just 1.3%.

But while you may be disappointed in your 2025 Social Security COLA, a 2.5% raise actually isn't so bad. Here's why.

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1. It's a sign of cooling inflation

You may not be thrilled to learn that your monthly Social Security checks are only getting a 2.5% boost. But you should know that a smaller Social Security COLA is a sign of slowing inflation. And cooling inflation could benefit your finances in a very big way.

When inflation slows down, it doesn't necessarily lead to lower prices for common goods and services. But what's likely to happen is that in the coming year, those costs will rise at a slower pace, leading to some degree of financial relief.

Of course, one caveat is that Social Security COLAs are based on past inflation, not future inflation. In other words, 2025's Social Security COLA is based on inflation data from 2024, not 2025. We can't know what inflation will look like in 2025 ahead of time.

However, what we do know is that the Federal Reserve plans to move forward with interest rate cuts in the coming months. That's likely to make consumer borrowing less expensive, which should lead to an uptick in demand.

And when consumer demand matches supply or outpaces it, that tends to lead to lower costs. So all told, a 2.5% raise in 2025 may go further than expected.

2. It's fairly in line with the average COLA over the past 10 years

A 2.5% Social Security COLA might seem stingy compared to recent raises. Not only did benefits increase 3.2% at the start of 2024, but in 2023, they rose a whopping 8.7%. And the year before that, they rose 5.9%.

But over the past 10 years, the average Social Security COLA amounts to 2.75%. So a 2.5% increase isn't so far off from that target.

Furthermore, there have been times in the past when Social Security recipients got no COLA at all. So in that context, a 2.5% raise isn't something to bemoan.

Be realistic about Social Security COLAs

Generally speaking, the role of Social Security COLAs is to help beneficiaries maintain their buying power. But you shouldn't expect any given COLA you receive to help you improve your buying power or your financial situation in general. If that's your goal, then you'll need to look beyond Social Security.

You may, for example, need to find part-time work to boost your savings and increase your capacity to cover your bills. Or, you may need to shed some expenses that are eating up a lot of your income.

But even during periods when Social Security COLAs are much higher, the best you should hope for is a comparable amount of buying power from the year before and nothing more. Recognizing that should also help put 2025's COLA in perspective.

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