Millions of seniors today rely on Social Security to make ends meet. For some people, those monthly benefits are their primary source of income. Others have only those benefits to turn to for money in retirement, so it stands to reason that Social Security's annual cost-of-living adjustments, or COLAs, are important to beneficiaries.
The purpose of Social Security COLAs is to help ensure that beneficiaries don't lose buying power over time. We all know that $1 today won't be worth $1 in 20 or 30 years. Similarly, Social Security benefits are pretty much guaranteed to lose buying power over time if they don't increase from one year to the next. That's why lawmakers decided to make those benefits eligible for automatic COLAs that are pegged to inflation.
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For much of the summer, there was a world of buzz around Social Security's 2025 increase. And about a month ago, the Social Security Administration announced that benefits would be rising by 2.5% in the new year.
Unfortunately, that's the smallest COLA to arrive in recent years. At the start of 2024, Social Security benefits increased by 3.2%, while the year before, seniors enjoyed a tremendous 8.7% COLA. So a 2.5% raise seems pretty stingy in comparison.
But the news for 2025 isn't all bleak. Although next year's COLA won't be as large as recent Social Security raises, seniors might end up doing just fine for one key reason.
Focusing on the positive
Social Security's 2025 COLA is a classic good news/bad news situation. The bad news is that benefits aren't rising so much. The good news is that the reason benefits are only getting a 2.5% lift is a slowdown in inflation. And if that slowdown continues into the new year, Social Security recipients may find that they're able to do reasonably well, financially speaking.
It's important to recognize that when Social Security benefits get a giant COLA, it's the result of rampant inflation. Smaller COLAs, by contrast, are indicative of the fact that living costs aren't rising at such a rapid pace. The average Social Security benefit might only rise a modest amount in 2025, but if inflation continues to cool, seniors may find that they're not spending as much as expected at the supermarket or that it doesn't cost as much as to put gas in their cars.
All told, Social Security recipients could largely break even in 2025 from a financial standpoint, even with benefits only rising 2.5%. So that's something to keep in mind before assuming the worst.
There are options for generating income
There's reason to be hopeful that Social Security recipients won't struggle too badly in 2025 despite a pretty small boost to their monthly benefits. But those who end up needing to supplement their Social Security income may have more options than expected.
The U.S. economy is still in a pretty strong place, which means those looking for work may have a decent number of options. And let's not overlook the gig economy, which gives seniors on Social Security the flexibility to earn money without having to commit to a rigid job schedule.
Plus, those looking to improve their finances can try shedding expenses or relocating to an area where Social Security buys more. This list of the cheapest states in which to retire is worth exploring for anyone who's mostly living on Social Security right now.
Seniors on Social Security may have been hoping for a larger COLA than 2.5% for 2025. But the news certainly isn't all bleak. With any luck, inflation will continue to cool to the point where Social Security recipients end up coming out OK.
