The annual Social Security cost-of-living adjustment, or COLA, is one of the most important features of the government program. Without those annual raises, seniors would quickly find the purchasing power of their monthly annuity checks failing to meet their needs. That might feel like the case for some even with the COLA.
The Social Security Administration announced a 2.5% COLA for 2025 on Oct. 10 this year. That number is far lower than in recent years. The last three years saw COLAs of 5.9%, 8.7%, and 3.2% as inflation soared. But many seniors are still feeling the effects of inflation, and a 2.5% raise to their benefits isn’t going to make much of a dent in their grocery bill.
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But there’s a surprising benefit of a lower COLA for many seniors, and it could be a lot more important than the increase in their Social Security check.
Social Security was never meant to replace your income in retirement. When the program first started, many companies offered employees pensions. Now most people have private retirement savings. Social Security is designed to supplement income from your retiremen
t savings.
If you saved even a small amount in your 401(k) or IRA while working, you likely have some nest egg you’re drawing on in retirement. Your retirement account doesn’t get a COLA — it gets whatever returns the market offers. Over the long run, investors can expect a balanced portfolio of stocks to outperform inflation. But there’s a lot of volatility that comes from investing in many securities.
It’s up to retirees to withdraw enough from their retirement accounts to cover their cost of living, regardless of how much their investments went up (or down). Theoretically, the purchasing power of Social Security will remain the same year after year. But the purchasing power of your retirement portfolio will be greater in periods of low inflation relative to high inflation, all things being equal.
So, retirees who have significant amounts invested in the market and use those savings to fund a meaningful portion of their spending are actually better off in a low-inflation, low-COLA environment. It appears we’re headed that way with 2025’s 2.5% raise.
Another reason many seniors should be happy about the lower COLA is the long-term effect of inflation (the factor that determines your COLA) on your retirement account withdrawals.
