Social Security's 2.5% COLA isn't as bad as it seems. This is why.

A 2.5% increase may not be much to write home about, but it’s not the worst possible outcome either.

Maurie Backman
| The motley fool

If you are among the millions of older Americans who rely heavily on… Social security If you’re trying to make ends meet in retirement, you may be unsure about the fact that your benefits will only increase by 2.5% in January.

Social Security is coming cost of living adjustment (COLA) is the smallest (by far) to arrive in years. And it’s normal to be disappointed by a meager increase in your monthly checks.

But when we look back at the data, it becomes clear that a 2.5% social security COLA isn’t that terrible. In fact, it is much more generous than some COLA beneficiaries have seen in the past.

The outcome could have been much worse

In 2024, social security benefits increased by 3.2%. The year before they rose by 8.7%. And in 2022, a COLA of 5.9% came through.

In light of these numbers, it’s easy to understand why a 2.5% COLA for 2025 seems like a slap in the face. But you should also know that these recent COLAs were fueled by a period of rampant inflation.

The whole reason that Social Security COLA will be much smaller in 2025 is that inflation has slowed quite a bit over the past year. So what seniors lose in the form of a smaller COLA, they gain in the form of less drastic price increases on their essential expenses.

It is also important to recognize that a 2.5% increase in Social Security benefits is certainly not the worst-case scenario as far as the program’s COLAs are concerned. On three different occasions – 2010, 2011 and 2016 – seniors on Social Security received a 0% COLA. And in 2021, Social Security’s COLA was just 1.3%. So while a 2.5% COLA may not exactly be cause for celebration, it’s not a catastrophically low pay increase either.

How to make a 2.5% COLA work for you

If you already feel like you’ll barely be able to cover your living expenses in retirement, a 2.5% Social Security COLA in 2025 may not make much difference to your financial situation. So if that’s the case, be proactive in improving your finances.

Start reevaluating the things you spend money on. Is it really necessary to pay for a car when you have access to public transportation right around the corner? Should you keep your 2,400 square foot home when a property half the size could be a lot cheaper to maintain?

Then reassess your ability to make money. You might assume that if you’ve been retired for years, it will be too difficult to get back into the workforce. But there may be opportunities to seek advice in your former field if you have unique skills, or if you have kept up with industry changes. Plus, there’s always the gig economythat is available to you regardless of your age or the number of years you have not had a work-related salary.

It’s not strange to wish for a bigger boost Social security than the 2.5% increase that is about to come in 2025. But it’s also important to put that increase in perspective and take steps yourself to make up for a COLA that isn’t what you want.

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