The 2025 Social Security COLA was announced last month. Here’s what it means for retirees

Social Security helps millions of older Americans stay afloat financially. And without these benefits, many would struggle to make ends meet.

Retirees who get most or all of their income from Social Security also rely on the program’s annual cost-of-living adjustments (COLAs) to ensure they are able to keep up with their bills from year to year. And last month, the Social Security Administration announced that benefits would be getting one 2.5% COLA in 2025.

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That may not seem like the best news for retirees at first. But here’s an overview of the good as well as the bad.

The smallest increase in years

Historically, a 2.5% Social Security COLA isn’t terrible. There have been years when COLAs were below 2%, and at several points they were 0%.

But a 2.5% COLA for 2025 stings because it’s the smallest that has arrived in years. At the start of 2024, seniors are on Social security saw their benefits increase by 3.2%. And the year before, Social Security recipients got a record COLA of 8.7%. So an increase of only 2.5% seems very small by comparison.

What makes matters worse is that Medicare Part B costs will increase in 2025. The standard monthly premium for Part B will increase from $174.70 to $185. And the extra $10.30 is going to eat into a lot of senior pay since many are enrolled in Social Security and Medicare at the same time.

In fact, without this increase in Medicare Part B costs, the typical Social Security recipient would be looking at an extra $49 a month when 2025’s COLA takes effect. Now, that increase has been cut to $39 for many older Americans.

A sign of slowing inflation

While a 2.5% COLA may only increase monthly benefits modestly in the new year, the upside is that a small COLA is a sign of cooling inflation.

When Social Security benefits get a big COLA, it’s always on the heels of a period of rampant inflation. So what seniors gain in the form of larger monthly checks, they lose in the form of less purchasing power at the store or in connection with their daily bills.

On the other hand, when Social Security benefits get a small COLA, it comes in the wake of a slower pace of inflation. So what seniors lose in the form of a smaller increase, they gain in the form of a cost of living that does not rise at such a rapid pace.

Put another way, the relationship between Social Security COLAs and inflation is designed to lead to a situation where things even out. So by 2025, the average Social Security recipient may see only a modest increase in their monthly checks. But that increase may be just enough to allow for the same amount of purchasing power as in 2024.

Of course, it’s best to have income outside of Social Security, no matter what a given year’s COLA looks like. But for seniors living mostly on monthly benefits, 2025 could be a more manageable year than expected, financially, if inflation holds steady or continues to cool.

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The 2025 Social Security COLA was announced last month. Here’s what it means for retirees was originally published by The Motley Fool