It’s definitely a good news/bad news situation.
Social Security helps millions of older Americans stay afloat financially. And without those 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) quite heavily to ensure that they’re able to keep up with their bills from year to year. And last month, the Social Security Administration announced that benefits would be getting a 2.5% COLA in 2025.
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That may not seem like the best news for retirees at first. But here’s a rundown of the good as well as the bad.
The smallest raise to arrive in years
Historically speaking, a 2.5% Social Security COLA isn’t terrible. There have been years when COLAs were under 2%, and at several points, they amounted to 0%.
But a 2.5% COLA for 2025 stings because it’s the smallest one to arrive in years. At the start of 2024, seniors on Social Security saw their benefits increase by 3.2%. And the year prior, Social Security recipients got a record-breaking 8.7% COLA. So a raise of just 2.5% seems awfully meager by comparison.
Making matters worse is that the cost of Medicare Part B is rising in 2025. The standard monthly Part B premium is increasing from $174.70 to $185. And that extra $10.30 is going to eat into a lot of seniors’ raise, since many are enrolled in Social Security and Medicare at the same time.
In fact, without that increase in Medicare Part B costs, the typical Social Security recipient would be looking at an extra $49 a month once 2025’s COLA takes effect. Now, that increase is whittled down to $39 for many older Americans.
A sign of slowing inflation
While a 2.5% Social Security COLA might only boost 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 large 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 buying power at the store or in the context of their everyday bills.
On the flipside, 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 living costs that aren’t rising 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 in 2025, the average Social Security recipient may only get a modest increase to their monthly checks. But that increase may be just enough to allow for the same amount of buying power as in 2024.
Of course, it’s best to have income outside of Social Security regardless of what a given year’s COLA looks like. But for seniors who mostly live on those monthly benefits, 2025 may be a more manageable year than expected, financially speaking, if inflation holds steady or continues to cool.