The Social Security Administration will announce the 2025 Social Security cost-of-living adjustment, or COLA, on Oct. 10, and it could disappoint many retirees.

Over the last three years, seniors have gotten used to super-sized raises. The COLAs for 2022, 2023, and 2024 were 5.9%, 8.7%, and 3.2%, respectively. But retirees could be in line for just a 2.5% raise in 2025, as things stand today.

However, there’s a surprising benefit to a lower COLA for many retirees, and it could mean many seniors are better off with a smaller monthly benefits check.

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How the government calculates the Social Security COLA

The annual cost-of-living adjustment for Social Security is designed to help Social Security benefits keep up with inflation. The Social Security Administration uses a subset of the consumer price index known as the CPI-W, which measures the cost of a basket of goods and services representative of the typical spending for an urban wage earner or clerical worker.

Specifically, the SSA measures the increase in the CPI-W during the third quarter of the year compared to the previous year. That increase becomes the COLA for the following year. So, 2025’s COLA will be official when the SSA receives the CPI-W reading for September on Oct. 10.

Many argue that the CPI-W isn’t representative of the expenses of most seniors. That means the COLA doesn’t keep pace with how much retirees are spending on goods and services each year. In fact, the Bureau of Labor Statistics created a new CPI subset called CPI-E, which measures the cost of a basket of goods that tracks the spending patterns of Americans age 62 and older. Those are the households the Social Security COLA directly affects.

Some have argued that switching the COLA to the CPI-E or some other measure more representative of the true costs retirees face will help many retired households maintain their standard of living. The Senior Citizens League says the average Social Security recipient who started benefits in 2010 has seen their purchasing power decline 20% since they received their first check.

But the fact that COLAs are based on a measure of inflation, even if it’s arguably the wrong one, means that a smaller COLA could surprisingly be a good thing for many retirees.

The surprising benefit of a small Social Security COLA

Many retirees don’t rely entirely on Social Security to fund their retirement budget. They saved and invested in their IRAs, 401(k)s, and taxable brokerage accounts.

The median household with someone aged 62 or older who saved and invested during their career had $200,000 invested across retirement and brokerage accounts at the end of 2022, according to the most recent Survey of Consumer Finances from the Federal Reserve. Based on the stock market returns since then, those balances have likely increased substantially.

Those investments don’t get any cost-of-living adjustment. They’re subject to the whims of the market. All things being equal, those investment accounts will have greater purchasing power when inflation is low. Meanwhile, the Social Security COLA is lower when inflation is low, but it’s theoretically supposed to maintain its purchasing power.

Retirees with significant retirement savings may be much better off with a lower COLA in 2025. You’ll actually have more purchasing power in the future if the COLA remains low.

Even if you’re heavily reliant on Social Security, slow and steady inflation is historically better for the overall purchasing power of those monthly checks than higher inflation. The Senior Citizens League found that, since 2010, Social Security’s buying power increased in the majority of years when the COLA came in below 3%. As the Fed continues to target 2% annual inflation, a 2.5% raise should still result in an increase in purchasing power next year.

So, while many might be disappointed in the SSA’s announcement on Oct. 10, seniors should find it easier to afford things in 2025 when they look at the full picture and their total retirement savings and income.

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