For months, there's been speculation about Social Security's 2025 cost-of-living adjustment (COLA). And at long last, seniors have an answer.
On Oct. 10, the Social Security Administration announced that benefits would be rising by 2.5% in the new year. That's in line with recent projections. But it might also read like a disappointment compared to recent COLAs.
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In 2024, Social Security benefits rose by 3.2% at the start of the year. In 2023, they rose 8.7%. So it's easy to see why a 2.5% raise pales in comparison -- at least at first glance.
But actually, a 2.5% COLA for 2025 isn't bad news at all. And there's a big reason for that.
Why a smaller COLA isn't terrible
If you're on Social Security , it's natural to want your benefits to increase as much as possible. But one thing you should realize is that because Social Security COLAs are tied to inflation, a smaller one indicates that living costs aren't rising as rapidly.
So yes, your benefits might only go up by 2.5% in the new year. But if the cost of things like groceries and gas increases at a slower pace than that, you could actually come out ahead.
Put another way, a larger Social Security COLA for 2025 wouldn't necessarily do you more good than a 2.5% raise. And the reason is that a larger COLA would mean higher levels of inflation.
Understand the role Social Security COLAs should play in your retirement finances
A big reason smaller COLAs tend to throw Social Security recipients for a loop is that many people expect those annual raises to improve their financial lives. But that's not what COLAs are meant to do.
The purpose of Social Security COLAs is simply to prevent seniors from losing buying power from one year to the next as inflation drives prices upward. But COLAs aren't meant to change seniors' finances in a meaningful way.
If you're looking for a way to improve your financial picture, you'll need to take matters into your own hands. Thankfully, you have some options in that regard.
Joining the gig economy is a great way to generate income. So is taking on a more traditional part-time job. And you're allowed to work and collect Social Security at the same time, though you'll need to be mindful of the program's earnings-test limits if you haven't yet arrived at your full retirement age.
Another option is to make strategic moves that allow you to stretch your Social Security checks further. These could include downsizing to a less expensive home or relocating to a part of the country where living costs are less expensive.
You may be inclined to look at a 2.5% Social Security COLA as a blow to your finances in the new year. But remember, a smaller raise means a smaller increase in consumer prices. So what you lose in one regard, you stand to gain in another.
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