Many retirees look forward to Social Security’s annual cost-of-living adjustment (COLA), which for 2025 is 2.5%. The COLA technically takes effect in December, with beneficiaries seeing updated payments in January.

The average retired worker collects around $1,925 per month from Social Security, so the 2.5% COLA will amount to a monthly raise of around $48. However, there’s good news and not-so-good news about what the COLA means for your future benefits.

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The good news about a smaller COLA

This year’s 2.5% COLA is the lowest since 2021, and it’s substantially smaller than the 5.9% and 8.7% raises we saw in 2022 and 2023, respectively. For many retirees, then, this adjustment is a bit of a disappointment.

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Keep in mind, though, that the COLA is directly tied to shifts in inflation. The adjustment is based on changes to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) — which tracks the costs of common goods and services. The Social Security Administration takes an average of the third-quarter CPI-W values, then compares that figure to the average from the same time period the year before.

If the average is higher, the percentage difference will be the COLA for the next year. So in July, August, and September 2024, the CPI-W average was 2.5% higher than in those same months in 2023, giving us the 2.5% COLA for 2025.

Meanwhile, back in 2022, the CPI-W average was a whopping 8.7% higher than the year before, reflecting record-high inflation rates. While that COLA substantially increased the average Social Security benefit the following year, it wasn’t necessarily a good thing.

A smaller COLA may sting in the short term, but it also suggests that inflation is cooling. For most retirees, lower costs overall will have a greater impact than a slightly larger COLA.

The not-so-good news about the future

Inflation has slowed substantially over the past couple of years, but historically, Social Security still hasn’t managed to keep up with rising costs.

In fact, Social Security has lost a whopping 20% of its buying power since 2010 alone, according to an ongoing study by nonprofit advocacy group The Senior Citizens League.

The study also revealed that since 2017, there have only been two years in which the COLA actually managed to keep pace with inflation. One of those years was 2023, which saw the highest adjustment in four decades. Even the 5.9% COLA in 2022 failed to match the actual 7% inflation rate for the year.

In theory, smaller COLAs are a good sign that inflation is cooling. But in reality, most adjustments fail to keep up with inflation as it is. As a result, benefits do not go nearly as far as they did even a decade or two ago.

What you can do to protect your benefits

You may not be able to control the COLA or inflation, but you can take steps to help your money last as long as possible in retirement. If you have savings in addition to Social Security, expect that you may need to rely on them more heavily if your benefits continue losing buying power.

If you can swing it, you may even choose to pick up some part-time work or add a source of passive income. Anything you can do to reduce your dependence on Social Security can help safeguard your finances if the program becomes less reliable in the future.

If nothing else, it’s wise to stay informed about how far Social Security can realistically go. By taking steps now to prepare for potentially losing more buying power, you can better protect your finances, no matter what happens going forward.

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