What Is a Social Security COLA and How Can It Affect Your Retirement Plan in 2025?

When most of us retire, we'll be living off our investments, to some degree and, most likely, also receiving critical income from Social Security. It's only fair, since most of us have been taxed on our earnings for Social Security (and Medicare) for all our working lives.

Here's a look at a key feature of Social Security benefits -- cost of living adjustments (COLAs) -- and how they might factor into your retirement planning.

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Meet the Social Security COLA

Join me on a quick trip in a time machine. The year is 1975 and you've just retired. You're collecting the average Social Security benefit at the time, which was around $207 per month. (That's close to $2,500 per year.) Fast-forward 50 years now and let's assume that you're still alive -- but very old. How much are you collecting from Social Security now?

Well, if benefits had never been adjusted upward, you'd still be collecting $207 per month, in 2025. That certainly won't go nearly as far as it used to! Thankfully, Social Security does adjust its payouts for inflation via COLAs. As of February, the average monthly retirement benefit check was $1,981 -- about $23,800 over the course of a year.

The magnitude of each COLA depends on inflation. There have been some years with 0% increases (most recently in 2015) and a few years with double-digit increases (1980 and 1981). There has been no increase of 6% or more since 1983, though -- except for 2022, which featured an 8.7% hike.

Here are some recent Social Security COLAs:

Source: Social Security Administration.

How Social Security COLAs can help your retirement

Clearly, we should be very happy that Social Security COLAs exist. We need our benefits to increase, to keep up with inflation.

One good strategy is to maximize your COLAs, which means maximizing your benefits. After all, the bigger your benefit, the bigger your COLA. Imaging, for example, that you collect $2,000 per month. If there's a 3% COLA, your benefit will increase by $60 to $2,060. If your benefit is $3,000, though, a 3% COLA will increase it by $90 to $3,090.

You may not be able to up your benefit from $2,000 to $3,000, but there are ways to increase your future benefits. A powerful way to do so is to delay starting to collect them. One study found that for 57% of people, waiting until age 70 is best to maximize benefits.

By the way, if you haven't done so already, it's a good idea to set up a "my Social Security" account at the Social Security website in order to see estimates of your future benefits -- based on your earnings history and depending on when you start collecting your Social Security benefits.

How Social Security COLAs might not help your retirement enough

Unfortunately, all is not perfect with Social Security, even with its COLAs. COLAs do help you keep up with inflation, but probably not completely: The increases are based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which is arguably the wrong inflation measure to use. That index is based on changes in the average prices of household goods such as food, housing, and transportation. It's focused on costs borne by workers more than retirees, though.

A better measure for calculating Social Security COLAs would be the Consumer Price Index for the Elderly (CPI-E), which weighs categories such as healthcare and housing more heavily.

Here's some even worse news: Social Security itself is on increasingly shaky ground. For many years, it took in more in taxes than it paid out, creating a surplus. But now, in part due to many people living longer and/or retiring earlier, more money is being paid out than is coming in, so the program's surplus is expected to be depleted in a few years. If nothing is done to strengthen Social Security, its trustees estimate that beginning in 2035, beneficiaries will receive only 83% of what they're due.

Fortunately, there are lots of ways to fix this problem -- but only if Congress takes action. (So let your representatives know what you think!)

A final concern is this: The Trump administration is floating ideas that could hurt Social Security in the long run, and has already taken some actions that could hurt many beneficiaries.

What should you do?

So here we are, with Social Security benefits increased for inflation via COLAs but Social Security itself threatened.

Remember, though, that Social Security income is vital, but most of us will need to set up a lot more retirement income for ourselves -- ideally via multiple retirement income streams. These could include Social Security, rental property income, pension income, income from fixed annuities, and more.

A particularly effective form of retirement income is dividend income, because healthy and growing dividend payers will tend to keep delivering dollars to you no matter what the economy is doing -- and they will often increase their payouts over time, too -- often outpacing inflation.

So go ahead and look forward to Social Security benefits and their nearly annual COLAs, but don't count on them fully supporting you or even coming close. Have a good retirement plan in place and stick with it.

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