There’s been lots of speculation about Social Security’s 2025 cost-of-living adjustment (COLA), but on Oct. 10, it all came to an end. That’s because the Social Security Administration announced a 2.5% raise for 2025, bringing the average monthly benefit up by about $50.

If you’re someone who’s dependent on Social Security, you may still be processing this information. And you should know that while a 2.5% COLA may not seem like much to write home about, there’s good news in the announcement as well.

Image source: Getty Images.

The bad news first

Let’s start with the not-so-great news: Social Security benefits are getting their smallest COLA in years in 2025. A larger COLA would’ve meant a larger monthly paycheck 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 boils down to a huge flaw in the way Social Security COLAs are calculated.

Social Security COLAs are based on third-quarter changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). But as you might imagine, the costs that Social Security recipients typically face aren’t the same as the costs urban wage earners commonly bear.

For seniors, healthcare tends to be a giant expense, but it’s not a heavily weighted factor in the CPI-W. Meanwhile, for workers, transportation, which carries more weight in the CPI-W, does tend to be a large expense. But you might spend less on transportation as a retiree without a commute.

Because of this, a decline in transportation costs may not do much to improve your financial picture, whereas for an urban wageworker, it has more of an impact. Therefore, using an index like the CPI-W to determine COLAs puts you in a position where you don’t benefit as much.

Worse yet, critics have blasted this problematic method of calculating COLAs for years to no avail. So not only might you be looking at a minimal income boost for 2025, but your 2026 Social Security raise might similarly fall short.

Now, the good news

A smaller Social Security COLA for 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 at less expensive groceries, gas, and utilities in the new year, as some examples. And that could be a very good thing for your finances.

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

Start following a budget if you aren’t using one already, and try to slash expenses you can reasonably cut. Downsizing, for example, isn’t easy. But if you’re able to move to a smaller home, it could reduce your monthly spending substantially.

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

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

So it’s important to set the right expectations not just for 2025, but beyond. And that could mean making adjustments to your lifestyle so you’re less dependent on Social Security COLAs on a whole.

The $22,924 Social Security bonus most retirees completely overlook

If you’re like most Americans, you’re a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $22,924 more… each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we’re all after. Simply click here to discover how to learn more about these strategies.

View the “Social Security secrets” »

The Motley Fool has a disclosure policy.