Social Security’s 2025 cost-of-living adjustment (COLA) will almost certainly be below average. Here’s why this is actually good news for retirees.

How much extra money will retirees get from Social Security next year? We’ll know for sure in just a few weeks. The Social Security Administration (SSA) is scheduled to announce the 2025 cost of living adjustment (COLA) on October 10, 2024.

While we’ll have to wait until then to find out the exact value of Social Security’s 2025 COLA, it will almost certainly be below average. Here’s why this is actually good news for retirees.

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Estimating what the 2025 Social Security COLA will be

Because of the way the SSA calculates the COLA, we can make a pretty good estimate of what it will be before October 10th. The increase will be based on inflation figures for the third quarter of 2024 compared to inflation figures for the same period in 2023.

The Consumer Price Index for Urban Wage and Service Workers (CPI-W) is the inflation metric used to calculate the Social Security COLA. We already know that the average CPI-W for the first two months of Q3 2024 is about 2.4% higher than the average for the entire third quarter of last year.

However, the COLA may be slightly higher if inflation accelerates somewhat in September. Social Security analyst Mary Johnson suspects that may be the case. It predicts a 2025 COLA of 2.5%.

Johnson’s former employer, The Senior Citizens League, is on the same page. The nonprofit also believes the 2025 COLA will be 2.5 percent. This would increase the average monthly benefit for retirees by $48.

Below average

If the actual COLA in 2025 is 2.4% or 2.5%, it will be significantly lower than in recent years. The increase for 2024 was 3.2%. In 2021 and 2022, the adjustment was 5.9% and 8.7%, respectively.

More importantly, a 2025 COLA of 2.4% or 2.5% will be well below the historical average. Since the automatic annual COLA began in 1975, the average increase has been 3.8%.

However, that period includes years of exceptionally high inflation in the 1970s and early 1980s. Looking only at the Social Security COLA in the 21st century, the average increase was 2.6%. A Social Security adjustment of 2.5% would still be slightly less than this average.

We should note, however, that COLAs after the Great Recession have been abnormally low. In three of those years, Social Security recipients didn’t get a raise at all.

Why a below-average Social Security COLA is good news for retirees

Psychologically, a higher Social Security COLA might make many retirees feel better than a smaller increase. However, there’s a strong case for why a below-average COLA is actually good news for retirees.

The key premise for this argument is the time value of money. Whatever the Social Security COLA amount is, retirees get the boost after they already paid higher costs for products and services. But a dollar received next year will be worth less than a dollar spent this year because of inflation’s erosion of purchasing power.

Therefore, the ideal Social Security COLA is no COLA. This will only happen when there is no inflation. From an objective financial standpoint, a low COLA is the next best thing to a zero COLA.

Many retirees likely won’t be happy that their Social Security increase is lower in 2025 than in previous years. But it’s smart to see the COLA for what it is — a delayed way to help offset the higher prices you’ve already incurred. Just like in the limbo game, the lower you go, the better you are.