What Is a Social Security COLA, and How Can It Affect Your Retirement Plan in 2025?

Retirees are often thought to be living on fixed incomes, but most of them are collecting Social Security benefits, and those benefits are not exactly fixed — because they’re increased nearly every year via cost of living adjustments (COLAs).

It’s important to understand what COLAs do — and how they can affect your retirement.

Understanding COLAs

The Social Security Administration (SSA) checks inflation levels each year, to determine whether benefits should be adjusted upward and if so, by how much. The most recent COLA, for 2025, disappointed many people, as it was just 2.5%. That’s very close to the 2.6% average annual increase over the past 20 years, though. Still, it seemed low because we’ve had some large increases in recent years:

Source: Social Security Administration.

As of January, the average monthly retirement benefit for retired workers was just $1,979 — only around $23,750 per year. If you boost that by 2.5%, it only becomes $2,028.48, or roughly $24,340 per year.

How will COLAs affect your retirement?

Social Security benefits will likely play a big role in your retirement. The SSA has noted that: “Among Social Security beneficiaries age 65 and older, 12% of men and 15% of women rely on Social Security for 90% or more of their income.” And 37% of men and 42% of women get at least 50% of their income from Social Security. See? It’s a big deal for millions of retirees.

Given that, it’s wonderful that benefits receive COLAs, which help retirees’ income keep up with inflation. They don’t do so sufficiently, though: COLAs are based on what many people consider to be a suboptimal inflation measure — the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). That index is calculated by the Bureau of Labor Statistics based on changes in the average prices of household goods such as food, housing and transportation. But it’s focused on costs borne by workers more than retirees.

A better measure for calculating Social Security COLAs is the Consumer Price Index for the Elderly (CPI-E), which weighs categories such as healthcare and housing more heavily.

Here’s another problem

COLAs aside, Social Security is facing some challenges. In the past, the program took in more money from taxes on wages than it paid out, so it amassed a surplus. Now, though, with people living longer and often retiring earlier, more money is being paid out of its coffers than is coming into them. That surplus, then, is expected to be depleted in 2035.

If nothing is done to strengthen Social Security, its trustees estimate that beginning in 2035, beneficiaries will receive only 83% of what they’re due. Fortunately, there are lots of ways to fix this problem — but only if Congress takes action. I’m not counting on that, but I’d love to be surprised.

Another potential problem is that cuts to Social Security are on the table now, per the current administration in Washington.

What should you do?

So how should you act on all this information? Here are some things you might do:

• Get a clearer idea of how much in benefits you can expect based on your earnings history after setting up a my Social Security account at the Social Security Administration (SSA) website.
• Do what you can to increase your future Social Security benefits — such as by earning as much as you can.
• Another smart move is trying to delay claiming your benefits. The longer you wait, the bigger they’ll be, and one study has found that for 57% of retirees, the best strategy is to wait until age 70. It might be best to plan to delay your entire retirement until 70, if that makes sense for you.
• Aim to set up multiple income streams for your retirement, so that you’re not counting on just Social Security.
• Consider building a portfolio of dividend-paying stocks. Dividends can be powerful wealth builders because they tend to increase over time when paid by healthy and growing companies — often rising by more than the inflation rate. Perhaps check out a few dividend-focused exchange-traded funds (ETFs).
• Adding one or more fixed annuities to your mix could be a good move, too. They can generate fairly reliable income.

Above all, do have a solid retirement plan in place. That will involve estimating how much income you’ll need in retirement and how you’ll get it. Never leave your retirement to chance.