Last month, the Social Security Administration announced the cost-of-living adjustment for 2025. Beginning in January, beneficiaries will receive a 2.5% raise — amounting to around $48 per month for the average retiree and roughly $39 per month for the average disabled worker.

While any extra cash can help make ends meet, many Americans are disappointed in the smaller COLA. It’s substantially smaller than the 8.7% and 5.9% raises from 2023 and 2022, respectively, and it’s also slightly lower than the 2.83% average over the past 10 years.

However, there is a major silver lining to a more moderate COLA, and it will likely have an even better effect on your retirement than a slightly larger raise.

Image source: Getty Images.

The good news about smaller COLAs

The COLA is designed to help Social Security benefits keep up with rising costs over time. It’s based on changes to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which is released monthly by the Bureau of Labor Statistics.

The Social Security Administration averages the CPI-W values in the third quarter of each year, and if the average is higher than that of the same time period the year before, the percent difference will be the COLA for the following year.

When inflation is surging, then, beneficiaries can expect a higher COLA the next year — which is why we saw record-breaking adjustments in 2022 and 2023. Prices began soaring in 2021, resulting in a higher-than-average COLA of 5.9% in 2022. And after the CPI peaked in June 2022 with a 12-month percentage change of 9.1%, beneficiaries saw an 8.7% COLA beginning in 2023.

The good news about a smaller COLA is that it signals a slowdown in inflation. The CPI’s 12-month percentage change in October 2024 was just 2.6%, down from 3.2% in October 2023 and 7.7% in October 2022.

Lower prices will generally have more of an impact on retirees’ budgets than slightly larger checks each month. So while a smaller COLA may seem like a disappointment on the surface, the silver lining is that everyday expenses are slowly becoming more affordable compared to the last few years.

Consider how the COLA fits into your retirement plan

Although the COLA can provide some extra cash each month, it’s not intended to improve your overall financial situation in any meaningful way. Again, higher COLAs are just supposed to make up for higher consumer costs, so even a larger raise may not necessarily provide more discretionary income.

If you’re looking to improve your financial health in retirement, you may need to take a more active approach. Finding a source of passive income, for example, can strengthen your nest egg without having to rely as much on Social Security. If you can swing it, you may also consider going back to work part-time or downsizing to a smaller home.

The 2.5% COLA heading into 2025 may feel like a letdown for many beneficiaries, but the good news is that it signals a shift in inflation. Lower prices will likely have an even stronger impact on your finances than the COLA, and a smaller adjustment is more positive than it may seem.

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.