As inflation begins to cool, the Social Security cost-of-living adjustment (COLA) for 2025 has been set at 2.5%.
This increase, although modest compared to the previous years, is a crucial lifeline for retirees, providing them with a slight boost to their benefits.
While some may have hoped for a more significant raise, this COLA comes amidst an economic shift that could impact retirees both positively and negatively in the long run.
Here’s everything you need to know about the Social Security COLA increase for 2025 and how it affects you.
What is the Social Security COLA increase for 2025?
The Social Security Administration has announced that beginning in January 2025, retirees will see a 2.5% increase in their benefits.
For the average retired worker, this means an additional $48 per month, bringing the typical monthly payment to $1,976.
Survivor beneficiaries and workers with disabilities will see smaller increases, with survivor benefits rising by $38 to $1,551, and disability benefits increasing to $1,580 per month.
While this adjustment may seem modest, it’s the fourth consecutive year that Social Security has seen a COLA above the average of 2.3% from the previous 15 years.
However, this 2.5% increase marks the lowest COLA since 2021, following two years of higher-than-usual adjustments due to inflation.
Why is the COLA for 2025 only 2.5%?
The COLA for Social Security is tied directly to changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which tracks the costs of goods and services.
In the third quarter of 2024, the CPI-W increased by 2.5% compared to the same period in 2023, setting the COLA rate for 2025.
While the smaller COLA may seem disappointing after the larger raises seen in 2022 (8.7%) and 2023 (5.9%), this adjustment suggests that inflation is beginning to cool.
This cooling effect could ultimately benefit retirees more in the long term, as lower inflation may result in reduced living costs, despite the modest COLA.
Impact on retirees and Social Security recipients
While a 2.5% increase is a step in the right direction, it does little to recover the significant loss of buying power that Social Security recipients have faced in recent years.
Since 2010, Social Security benefits have lost approximately 20% of their purchasing power, according to the Senior Citizens League.
Even the higher COLAs of recent years have struggled to keep up with actual inflation rates, making it difficult for retirees to cover the rising costs of healthcare, housing, and daily expenses.
In 2023, the COLA only matched inflation for that year, but for many, it was still not enough to make up for past losses.
How to maximize Social Security benefits
With the COLA increase being relatively modest, retirees and soon-to-be retirees should look for ways to stretch their benefits further.
It is important to have additional savings to supplement Social Security income, particularly as inflation continues to affect the economy.
If you have the ability, part-time work or passive income sources can help to reduce your reliance on Social Security.
Consider working with a financial advisor to ensure that your retirement savings are optimized for long-term growth.
Additional changes in Social Security for 2025
In addition to the 2.5% COLA increase, several other key changes will take effect in 2025.
For example, the maximum monthly benefit at full retirement age will increase to $4,018, and early filers will see a rise in withholding thresholds.
Those with disabilities will also benefit from higher income limits, allowing them to earn more before their benefits are affected.
The 2025 Social Security COLA increase may not be as high as some had hoped, but it is a sign that inflation is easing and cost-of-living adjustments are becoming more stable.
While retirees must continue to plan for the future, understanding how to make the most of their benefits and supplementing them with other sources of income will be essential to financial security in retirement.
As you prepare for 2025, stay informed about the changes to Social Security and make adjustments to your retirement plans accordingly.
Though modest, the COLA increase represents an important step forward for millions of retirees, helping them navigate the ongoing economic shifts.
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