Personal Finance

Why Your 2025 Social Security Raise Isn't Really a Raise After All

Christy Bieber

Published: January 27, 2025 9:33 am

If you collect Social Security payments, you may be pleasantly surprised when you get your first direct deposit or your first check in 2025. You are most likely going to see that your payment is a little bit bigger than last year’s.

Of course, it’s nice to get extra money. Unfortunately, despite the fact that this benefits bump is commonly referred to as a “raise,” it really isn’t. It’s a Cost of Living Adjustment and it does not mean you’re going to get to enjoy more buying power just because you are getting a larger payment. Here’s why.

Why a Social Security raise isn’t really a raise

The sad reality that retirees must come to terms with is that your Social Security check doesn’t get bigger every year in order to give you more buying power. Instead, the sole purpose of your benefits increase is to stop your benefits from losing value. This is different from a raise you would get at work, which is usually intended to reward you with more money because of your valuable job skills or because of your longevity with the company and loyalty to the business.

While your raise at work may be based on merit, or based on the company’s budget, or based on their desire to pay you market value so you don’t job hop, the Social Security Cost of Living Adjustment is calculated very precisely to match the rate at which prices increase. Specifically, data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is used to determine the amount of the COLA. If third-quarter CPI-W data shows that prices increased year-over-year, your Social Security benefits bump is going to equal the amount of the increase.

In 2025, for example, seniors received a 2.5% COLA. The reason that the Social Security Administration raised benefits by this amount is because CPI-W data showed a 2.5% year-over-year increase when looking at the average cost of goods and services in the third quarter of the year. Since the raise seniors get is exactly calibrated to the rise in prices, they do not get any extra benefits from it. They just get to afford to keep buying what they were already purchasing, albeit at higher prices.

Retirees need to understand the impact of COLAs on their spending power

For seniors hoping for a big Social Security raise, the reality is that you cannot enjoy a more luxurious lifestyle just because you have more money coming in your benefit checks.

By contrast, the bigger the raise, the more you may need to cut down on your spending. That’s because you probably have income coming from other places besides Social Security and when your benefits increase is big, it’s because inflation is surging. That other money loses buying power when that happens since it doesn’t automatically increase when prices rise.

While it may be disappointing to realize your Social Security raise doesn’t help you out much in terms of your finances, it remains very important because otherwise, you would be able to buy far less over time. It’s also important to know the truth about what COLAs can do for you so you can budget accordingly and not find yourself taking too much money out of your retirement accounts to maintain the same lifestyle even at a time when costs have gone up substantially.