Social Security Benefits Get a COLA in 2025 full of good and bad news

There has been a lot of speculation about Social Security’s 2025 cost of living adjustment (COLA), but on October 10, it all came to an end. That’s because the Social Security Administration announced a 2.5 percent increase by 2025, increasing the average monthly benefit by about $50.

If you are someone who depends on Social Security, you may still be processing this information. And you should know that while a COLA of 2.5% may not sound like much to write home about, there is some good news in the announcement as well.

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First the bad news

Let’s start with the not-so-good news: Social Security benefits are getting their smallest COLA in years by 2025. A bigger COLA would have meant a bigger monthly check for you to enjoy.

But perhaps an even bigger problem is that your 2.5% COLA is unlikely to keep pace with inflation. And the reason comes down to a major flaw in the way Social Security COLAs are calculated.

Social Security COLAs are based on changes in the third quarter of the Consumer Price Index for Urban Wage Earners and Employees (IPC-W). But as you can imagine, the costs Social Security recipients typically face are not the same as those typically borne by urban wage earners.

For seniors, health care tends to be a huge expense, but it’s not a heavily weighted factor in the CPI-W. Meanwhile, for workers, transportation, which weighs more heavily in the CPI-W, tends to be a major expense. But you may spend less on transportation as a retiree without commuting.

Therefore, a decrease in transportation costs may not improve your financial picture, while for an urban salaried worker it has more impact. So using an index like the CPI-W to determine COLAs puts you in a position where you won’t benefit as much.

Worse, critics have railed against this problematic COLA calculation method for years to no avail. So not only could you be looking at a minimal income increase for 2025, but your 2026 Social Security increase could also fall short.

Now, the good news

A smaller Social Security COLA by 2025 may not seem like something to celebrate. But the upside is that a smaller COLA is a sign of cooling inflation. That means you may be looking for less expensive groceries, gas, and utilities in the new year, as examples. And that could be very good for your finances.

But unfortunately, the good news ends there. So, if you’re worried about going overboard with a 2.5% raise, take steps to improve your financial situation.

Start following a budget if you don’t already use one and try to reduce expenses that you can reasonably reduce. Downsizing, for example, is not easy. But if you can move to a smaller home, it could significantly lower your monthly expenses.

Another helpful move is to generate income with some kind of job, whether it’s a gig job or a more traditional part-time role. Not only can this give you more buying power, but it will allow you to replace your savings for peace of mind and for unplanned expenses that a typical Social Security COLA won’t cover.

Social Security benefits are only increasing by 2.5% in 2025. And that 2.5% COLA is certainly a mixed bag. But 2025 likely won’t be the only year with a disappointing Social Security COLA that doesn’t improve your financial picture.

It is therefore important to set the right expectations not just for 2025, but beyond. And that might mean making adjustments to your lifestyle so that you’re less dependent on Social Security COLAs altogether.