3 Ways a Smaller Social Security COLA Increase Isn’t All Bad News

Retirees waiting for their Social Security check to grow might be pleased by the government's recent announcement of the cost of living (COLA).

Most retirees can expect their Social Security checks to rise in 2025 based on the recent COLA. But even with bigger checks, there are some drawbacks to consider.

Find out how the Social Security COLA may boost your finances in some ways — and how it might not be much help to your retirement plan in other ways.

The Social Security COLA has a direct impact on the size of your Social Security checks.

The Social Security Administration (SSA) uses a formula — which includes data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) — to determine the increases.

In October, the Social Security Administration announced a COLA of 2.5%. That COLA — which will go into effect in 2025 — is the lowest in years.

The COLA will significantly impact the finances of millions of Social Security benefit recipients. Here are some of the pros and cons of this year’s COLA.

This year’s COLA was 2.5%, which is quite modest compared to the COLAs of recent years.

Recent COLAs are as follows:

• 2024: 2.5%
• 2023: 3.2%
• 2022: 8.7%
• 2021: 5.9%
• 2020: 1.3%

Of course, even a modest increase is welcome.

Why was this year’s COLA smaller than in recent years? Because inflation is subsiding.

Americans have seen inflation cool in recent months, and that is great news for consumers. But the high costs of recent years are unlikely to suddenly fall. In fact, many of these elevated costs are probably here to stay.

That means that even with a small uptick in your Social Security benefit, you still might struggle to make ends meet.

For example, shelter and transportation costs are still putting tremendous pressure on household budgets. A 2.5% bump in Social Security income is unlikely to change that fact.

Health care costs are a big deal for retirees. As we get older, most of us need more medical care.

Unfortunately, such costs are not going to fall anytime soon.

From Medicare premiums to out-of-pocket health care costs, the growing expense of medical care might easily gobble up some or all of the recent Social Security COLA.

Any boost to Social Security benefits is good news for both those collecting benefits today and those who expect to file for benefits in the future.

Whether or not you are currently collecting Social Security benefits, the recent COLA will help grow the size of future checks for all recipients. And someday, one of those recipients will likely be you.

A larger Social Security benefit increases your income. In some situations, this might push your income high enough to require paying more income taxes on your Social Security benefits.

According to the Social Security Administration, around 40% of people receiving Social Security checks pay federal income taxes on the benefits. Typically, this occurs when you have substantial income on top of your Social Security check.

Such income might include:

• Wages
• Earnings from self-employment
• Interest
• Dividends
• Other taxable income

Your combined income — your adjustable gross income plus nontaxable interest and one-half of your Social Security benefits — determines how much you pay in tax.

For example, married filers with a combined income between $32,000 and $44,000 would have to pay an income tax on up to 50% on their benefits. And married filers with an income of more than $44,000 would have to pay an income tax on up to 85% of their benefits.

If the COLA pushes your combined income higher, a bigger portion of your Social Security check might be subject to taxes.

A smaller Social Security COLA compared to recent years might lead to an initial disappointment for some retirees. But there is a silver lining: Inflation is finally cooling down.

If you have been struggling to handle rising costs, cooling inflation may provide some relief. Hopefully, a lower inflation rate will make it easier to maintain your lifestyle.

If grocery and gas prices stabilize, you might finally get some breathing room in your budget.

A bump in your Social Security check is always appreciated. After all, everyone wants more wiggle room in their budget.

However, solely relying on your Social Security checks to get by in retirement can be difficult.

The good news is that there are many ways to supplement your Social Security income, from taking a part-time job to developing a side hustle. Take action today to grow your income and increase your financial stability in retirement.