7 Basic Facts All Retirees Should Know about the 2025 COLA Increase

For the 68 million Americans receiving Social Security benefits, knowing exactly how much money they'll receive each month is an essential part of your retirement budget.

If you're among this number, you can expect your benefits payment to change at the start of each year when the Social Security Administration's cost of living adjustment (COLA) takes effect.

This year's COLA increase is much lower than the past few years. We'll explain what increase you can expect, why it's lower than previous years, and what else you need to know about the upcoming change.

Social Security benefits will increase by 2.5% for the 2025 tax year. The change applies to the 68 million Social Security beneficiaries and the 7.5 million Supplemental Security Income (SSI) beneficiaries.

The increase translates to an average of around $50 extra per person per month.

The 2.5% COLA increase will take effect for Social Security beneficiaries on January 1, 2025, and for SSI beneficiaries on December 31, 2024.

Yes, compared to the last several years, this year's COLA increase is lower than Social Security recipients have come to expect.

For instance, in 2021, Social Security payments increased by 5.9%. In 2022, they increased by a record-setting 8.7%, the highest since 1981. And in 2023, they increased by 3.2%.

This year's 2.5% increase is the lowest since the pandemic.

Runaway inflation during and after the COVID-19 pandemic drastically increased the cost of living for most Americans for several years. As a result, the last three COLA increases have been much higher than average.

However, now that inflation is evening out, the Social Security Administration is returning to a more typical COLA increase. While 2.5% seems low compared to the last few years, it's still the fifth-highest increase since 2015.

For example, in 2015, there was no COLA increase, and in 2016, the increase was just 0.3%.

The 2.5% COLA increase is standard across the entire country. No matter which state you call home, your baseline benefit will increase by exactly 2.5%.

However, the exact dollar amount you'll receive based on your COLA increase depends on a few factors — specifically, how high your baseline Social Security payment is already.

The Social Security Administration calculates your monthly benefit amount based on how young you are when you retire and apply for benefits, how many years you spent paying into the general Social Security fund while working, and how much you earned throughout your career.

In other words, your state of residence won't determine the exact dollar amount you receive once the COLA change takes effect.

But if you live in a state with a higher median income than the rest of the country, you probably receive a higher dollar amount as your monthly benefits check than people in states with a lower median income.

As a result, your benefits check could increase by closer to $52.50 per month instead of $49 per month.

While the COLA increase reflects the current inflation rate (an average of 2.4% in September 2024), it isn't necessarily enough to help retirees keep pace with higher prices.

That's because a lower inflation rate doesn't automatically mean prices will drop. Instead, the higher cost of goods you've come to expect over the last few years will probably stay the same.

Luckily, you shouldn't have to deal with dramatically increased prices every time you visit the store, but you can't expect prices to return to their pre-pandemic norms.

If this year's COLA increase isn't enough to boost your bottom line, you might consider a few options to round out your budget. For instance, if you have spare time and a useful skill set, you might look for part-time side gigs to stay afloat.

Downsizing can help you save money on utilities, and relocating to a city with a lower cost of living can help extend your purchasing power.

Of course, it's always worth reviewing your budget to ensure your money goes where you want it to. The lead-up to the new year is a great time to make changes to continue hitting your financial goals in retirement.

Although a $50-a-month increase isn't much compared to past years, any increase in your monthly income is a reason to celebrate.

Before the Social Security benefit hits your bank account, start planning how you will allocate your extra funds.

Planning ahead can ensure that your enhanced Social Security benefit affects your budget and whether or not you'll need to supplement your income.