There has been speculation for months about Social Security’s cost of living adjustment (COLA) through 2025. And finally, seniors have an answer.

On October 10, the Social Security Administration announced that benefits would increase by 2.5% in the new year. This corresponds to the latest forecasts. But compared to recent COLAs, it might also read like a disappointment.

In 2024, Social Security benefits increased by 3.2% at the start of the year. In 2023 they rose by 8.7%. So it’s easy to see why a 2.5% increase pales in comparison – at least at first glance.

But actually, a 2.5% COLA for 2025 isn’t bad news at all. And there is an important reason for this.

Why a smaller COLA isn’t so bad

If you are a Social Security recipient, it goes without saying that your benefits will be increased as much as possible. However, you should be aware that Social Security COLAs are tied to inflation and a smaller value indicates that the cost of living is not rising as quickly.

Yes, your benefits may only increase by 2.5% in the new year. But if the cost of things like groceries and gas rises more slowly, you could actually come out ahead.

In other words, a higher Social Security COLA for 2025 wouldn’t necessarily benefit you more than a 2.5% increase. And the reason is that a larger COLA would mean higher inflation.

Understand the role Social Security COLAs should play in your retirement finances

A big reason that smaller COLAs tend to upset Social Security recipients is that many people expect these annual raises to improve their financial lives. But that’s not what COLAs are for.

The purpose of Social Security COLAs is simply to prevent seniors from losing purchasing power from one year to the next as inflation drives up prices. But COLAs aren’t intended to make meaningful changes to seniors’ finances.

If you are looking for a way to improve your financial situation, you need to take matters into your own hands. Luckily, you have a few options in this regard.

Joining the gig economy is a great way to generate income. The same goes for taking on a more traditional part-time job. And you can work and receive social security at the same time. However, you must be aware of the program’s earnings limits if you have not yet reached your full retirement age.

Another option is to take strategic actions that allow you to further stretch your Social Security checks. This could include downsizing to a cheaper home or moving to a part of the country where the cost of living is cheaper.

The story continues

You may be inclined to view a 2.5% COLA as a hit to your finances in the new year. However, keep in mind that a smaller increase means a smaller increase in consumer prices. So what you lose in one respect, you may gain in another.

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The 2025 Social Security COLA has a big glimmer of hope for retirees and was originally published by The Motley Fool