Maximizing Social Security – Why the COLA Increase Could Be Even Better

As retirement draws nearer, Social Security becomes a much more prominent topic of interest. For many retirees, it represents a vital income stream. In fact, Social Security helps more than 22 million people stay above the poverty line, according to the Center for Budget and Policy Priorities. However, while Social Security is crucial, it may not offer as much financial support as many expect.

In August, the average monthly benefit was about $1,920 — which totals around $23,000 annually. Fortunately, cost-of-living adjustments (COLAs) increase Social Security benefits to keep up with inflation, and for 2025, a COLA of approximately 2.5% is expected.

Let’s break down the implications of this adjustment and what it means for retirees.

COLA

A COLA is designed to adjust Social Security benefits in line with inflation, ensuring retirees’ purchasing power doesn’t drastically decline over time. Most years see a COLA, though there are exceptions. Here’s a look at the past few years:

The adjustments can vary significantly, with inflation dictating whether increases are modest or substantial. The average COLA over the last two decades has been around 2.6%.

Positives

Even though 2025’s expected 2.5% increase may seem small, it’s better than nothing. It’s also important to remember that some other retirement income sources, like fixed annuities or pensions, don’t adjust for inflation at all.

Let’s say you delay collecting Social Security until age 70, which increases your benefits and consequently your COLA amounts. For instance, if delaying boosts your benefit from $2,000 to $2,500, a 2.5% COLA translates into a $62.50 monthly increase rather than $50. The higher your benefit, the bigger your COLA impact over time.

This annual boost helps protect retirees from inflation, which can erode the value of fixed income streams. Imagine retiring for 30 years; if inflation averages 3% annually, the purchasing power of a fixed income would drop by nearly half after 25 years. With COLAs, Social Security helps mitigate that decline.

Drawbacks

While COLAs are beneficial, they aren’t perfect. They are based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which reflects the inflationary pressures experienced by working individuals, not retirees. The CPI-W tracks price changes in categories such as housing, transportation, and food. But it doesn’t reflect the reality that retirees often spend more on healthcare, an area experiencing steeper inflation.

A more appropriate measure might be the Consumer Price Index for the Elderly (CPI-E), which assigns greater weight to healthcare costs. However, current COLAs don’t use this index, leaving retirees vulnerable to healthcare costs outpacing their benefit increases.

Despite this drawback, retirees should still appreciate the positive impact of Social Security COLAs. Even though the system is imperfect, it does provide a degree of protection against inflation.

Benefits

The timing of when you start collecting Social Security can have a significant impact on your lifetime benefits. Delaying benefits until age 70 not only increases your monthly benefit but also the impact of COLAs. The higher your benefit at the outset, the more substantial each annual COLA adjustment will be, creating a snowball effect over the years.

So, if you’re nearing retirement and can afford to delay claiming Social Security, it’s worth considering. This strategy may result in thousands of dollars in additional lifetime benefits.

As we wait for the final announcement of the 2025 COLA, expected on October 10, it’s a good time to review your retirement income plans and explore strategies to boost your Social Security benefits.

While the estimated 2.5% adjustment may not seem like much, over time, these annual increases provide meaningful financial security in retirement, especially when other sources of income might not adjust for inflation.

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