Social Security's COLA Is Great, but It Could Be Greater

As you approach and enter retirement, you'll find yourself much more interested in Social Security -- a topic that perhaps used to seem dreadfully dull. Social Security provides vital income for retirees -- indeed, it keeps more than 22 million people above the poverty line, per the Center for Budget and Policy Priorities.

But it doesn't provide quite as much income as many people might expect. As of August, the average monthly benefit for retirees was just $1,920, or about $23,000 for the year. That's not a lot, but here's some good news: Social Security benefits are increased in most years, via cost-of-living adjustments (COLAs).

The COLA for 2025 is expected to be around 2.5%, per the Senior Citizens League. Let's put that into perspective, because there are some good and some not-so-good things about it.

COLA basics

First, know that while COLAs occur in most years, boosting retirees' income to help keep up with inflation, there are some low-inflation years with no COLAs. But those are relatively rare. Here are some recent COLAS:

Data source: Social Security Administration.

You see that they can get quite high or be quite low. The average COLA over the past two decades or so has been about 2.6%.

Reasons to be happy about the 2025 Social Security COLA

So. what's so good about a 2.5% increase or even a 3.5% one, both of which might seem puny? Well, retirees should celebrate that Social Security benefits increase over time -- period. Some sources of income in retirement do not, or increase more slowly.

Interest payments from savings accounts, for example, can go up and down over time, and they spent a long time being extremely low in the last decade or so. A fixed-rate annuity will deliver a fixed income stream -- unless you're able to pay more for some annual increases. A pension may be fixed as well.

Any fixed income stream will see its purchasing power shrink dramatically over a long period. For example, your retirement may last 30 years. If inflation averages around 3% annually, you could see your purchasing power cut roughly in half over 25 years -- so that in your last years, something that cost you, say, $1,000 in 2024 may cost you $2,000 in 2049.

If it makes sense for you -- and it does for most people -- aim to delay starting to collect your Social Security benefits until age 70, because that can maximize your total benefits. That can also help maximize your COLAs. For example, imagine that by delaying, you increase your benefit check from around $2,000 to $2,500. A 2.5% increase would be $50 for a $2,000 benefit, but $62.50 for a $2,500 one. Your next COLAs would result in bigger increases, as well -- for the rest of your life.