Retirees in 2025 will get the smallest Social Security benefits increase in several years. While this may seem disappointing, it’s actually a good thing for most seniors.
In 2025, more than 72.5 million Americans will start getting more money from Social Security. That’s because those who receive benefits are entitled to a cost-of-living adjustment (COLA) next year.
If you’re one of those Americans, you may actually be disappointed by your COLA, since it probably won’t be as big as you hoped. Although it’s understandable to be frustrated you aren’t getting the raise you may have been anticipating, it’s actually a good thing if you understand the details.
Here’s why.
Image source: Getty Images.
This is why your COLA is going to disappoint you
When you get your first Social Security check for 2025, you may be surprised to find that the cost-of-living adjustment is smaller than the ones you’ve received in recent years.
In 2025, you’ll be getting a benefits bump of 2.5%. While that may seem generous, it’s smaller than the increases Social Security recipients have received in recent times. In fact, here’s what the annual raises have looked like for the past few years:
- January 2025: 2.5%
- January 2024: 3.2%
- January 2023: 8.7%
- January 2022: 5.9%
The 2025 increase is the smallest since 2021, when retirees received only 1.3% more in their Social Security checks compared to the prior year. For seniors on a fixed income who may have been struggling financially in recent years, a smaller-than-expected raise can really throw a wrench in your financial plans.
Here’s why you should be happy with a smaller raise
Although it seems to make perfect sense to be upset about a smaller COLA than you’ve come to expect, the reality is that you should actually be happy about the situation.
That’s because your benefits increase doesn’t work like a regular raise. You don’t get more money because you’re performing better or because the company or the economy is doing well. Instead, your annual COLA is based on a formula designed to measure the level of inflation. Specifically, it’s directly related to a year-over-year increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
In other words, the big raises that Social Security recipients have received in recent years happened as a direct result of the fact that inflation was near record highs. And, despite the big raises, inflation is actually really bad for retirees.
See, most people who are retired rely on other income sources to supplement their Social Security besides their benefits alone. This money usually comes from savings accounts or investment accounts. Unfortunately, all of this other money does not just increase automatically to keep pace with inflation. Instead, as prices go up, it often loses buying power.
Lower inflation is great news for seniors because it means the value of their dollars is not eroding as fast as it was. The smaller COLA is a consequence of this cooling inflation, but that’s a price well worth paying in order to avoid huge price increases on everything you buy.
So, retirees must be prepared for the fact they’ll receive only a small increase to their Social Security checks in 2025 — but they absolutely should not feel disappointed when that happens since it is a symptom of cooling inflation, which is better for their overall financial situation.