Social Security’s 2.5% COLA isn’t as bad as it may seem. Here’s why.

On November 18, 2024By Littum

A 2.5% increase might not be much to write home about, but it’s not the worst possible outcome either.

Maurie Backman
| The motley fool

If you’re among the millions of older Americans who rely heavily on Social Security to make ends meet in retirement, you may be reeling from the fact that your benefits will only increase by 2.5% in January.

Social Security’s upcoming cost-of-living adjustment (COLA) is the smallest (by far) to come this year. And it’s natural to be disappointed by a modest increase in your monthly checks.

But when we look back at the data, it becomes clear that a 2.5% Social Security COLA is not so terrible. In fact, it is much more generous than some of the COLA recipients have seen in the past.

The result could have been much worse

In 2024, social security benefits increased by 3.2%. The year before, they increased by 8.7 per cent. And in 2022, a COLA of 5.9% came through.

In light of these numbers, it’s easy to see why a 2.5% COLA for 2025 seems like a slap in the face. But you should also know that these recent COLAs were driven by a period of rampant inflation.

The whole reason 2025’s Social Security COLA will be much smaller is that inflation has fallen nicely over the past year. So what seniors lose in terms of a smaller COLA, they gain in terms of less drastic price increases on their essential expenses.

It’s also important to recognize that a 2.5% increase in Social Security is by no means the worst-case scenario in terms of the program’s COLAs. On three separate occasions – 2010, 2011 and 2016 – seniors on Social Security received a 0% COLA. And as recently as 2021, Social Security’s COLA was just 1.3%. So while a 2.5% COLA might not exactly be cause for celebration, it’s not a catastrophically low raise either.

Here’s how to make a 2.5% COLA work for you

If you already feel like you can barely cover your living expenses in retirement, a 2.5% Social Security COLA may not do much to change your financial picture in 2025. So, if that’s the case, be proactive with improving your finances.

Start by reassessing the things you spend money on. Is it really necessary to pay for a car when you have access to public transport around the corner? Do you need to hang on to your 2,400 square foot home when a property half that size can be much cheaper to maintain?

Next, you need to reassess your ability to earn money. You might assume that if you’ve been retired for years, it will be too difficult to break back into the workforce. But there may be opportunities to consult in your former field if you have unique skills or if you’ve kept up with industry changes. Plus, there’s always the gig economy, which is available to you regardless of your age or the number of years you’ve gone without a job-related paycheck.

It is not a strange thing to desire a greater lift from Social security than the 2.5% increase that is about to arrive in 2025. But it’s also important to put this increase in perspective and take steps on your own to offset a COLA that isn’t what you want it to be be.

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