Social Security benefits will only increase 2.5% in 2025, but here’s why it might not hurt retirees

Millions of seniors today rely on Social Security to make ends meet. For some people, these monthly payments are their primary source of income. Others have only these 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 do not lose purchasing power over time. We all know that $1 today will not be worth $1 in 20 or 30 years. Similarly, Social Security benefits are pretty much guaranteed to lose purchasing power over time if they don’t increase from one year to the next. That’s why lawmakers decided to make these benefits eligible for automatic COLAs tied to inflation.

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For most of the summer, there was a world of buzz about Social Security’s increase in 2025. And about a month ago, the Social Security Administration announced that benefits would increase by 2.5% in the new year.

Unfortunately, this is the smallest COLA that has arrived in recent years. At the start of 2024, Social Security benefits increased by 3.2%, while the year before seniors enjoyed a whopping 8.7% COLA. So a 2.5% increase seems pretty stingy in comparison.

But the news for 2025 is not all bleak. Although next year’s COLA won’t be as large as recent Social Security increases, seniors may end up doing just fine for one important reason.

Focus on the positive

Social Security’s 2025 COLA is a classic good news/bad news situation. The bad news is that the benefits don’t increase that much. The good news is that the reason benefits are only getting a 2.5% boost is because of a slowdown in inflation. And if that slowdown continues into the new year, Social Security recipients may find that they are able to do reasonably well financially.

It’s important to recognize that when Social Security benefits get a huge COLA, it’s the result of rampant inflation. Smaller COLAs, on the other hand, are signs that the cost of living is not rising at such a rapid pace. The average Social Security benefit may increase only a modest amount in 2025, but if inflation continues to fall, seniors may find that they don’t spend as much as expected at the grocery store, or that it doesn’t cost as much to put gas in their cars.

All told, Social Security recipients could largely break even by 2025 from a financial standpoint, even with benefits increasing only 2.5%. So that’s something to keep in mind before you assume the worst.

There are opportunities to generate income

There’s reason to hope that Social Security recipients won’t struggle too badly in 2025, despite a fairly 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 US 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 who want to improve their finances can try to cut expenses or move to an area where Social Security buys more. This list of the cheapest states to retire is worth exploring for anyone living mostly on Social Security right now.

Seniors on Social Security may have been hoping for a bigger COLA than 2.5% for 2025. But the news is certainly not all bleak. With any luck, inflation will continue to cool to the point where Social Security recipients end up coming out OK.