Key Takeaways:

• Social Security is expected to increase in 2025, but it likely won’t be as much as we’ve seen for the last few years. 
• This increase in benefits is due to rising inflation, but it brings the program’s solvency under even more scrutiny. 
• We recommend a diverse investment strategy for retirement planning. Future retirees should preferably not put all their eggs into the Social Security basket. 
• Read our free report “2 Dividend Legends to Hold Forever.“

70.6 million people receive Social Security benefits, and around 30% of all retirement income comes directly from Social Security. Simply put, it’s a huge deal for retirees.  

As inflation continues to impact everyday expenses, the program’s cost-of-living adjustments (COLA) are set to play a crucial role in 2025, with benefit increases expected. For many retirees, the adjustment will provide much-needed relief from rising prices. 

However, this raise isn’t without its downsides. Concerns over Social Security’s long-term sustainability have been clear for a long time. According to the SSA, the program will only be able to pay 75% of promised benefits by 2035. 

We’ll explore how inflation affects Social Security and what beneficiaries can expect in 2025 below. 

Impact of Inflation on Social Security Benefits

Inflation plays a critical role in determining the annual adjustments made to Social Security benefits. The government calculates these adjustments, known as cost-of-living adjustments (COLA), based on changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

This index tracks the price for goods often purchased by “urban wage earners and clerical workers” (aka. your average family). It’s a way to track inflation based on what the average American worker sees on the ground. 

When inflation rises, the cost of everyday goods and services increases, making it more expensive for retirees and other beneficiaries to maintain their standard of living. To ensure that retirees can still afford to survive, Social Security benefits are adjusted according to this index each year. 

Experts predict another COLA increase in 2025 due to ongoing inflationary pressures. We do not have exact numbers yet, but this increase will likely be smaller than it was during the COVID-19 years. 

For context, the COLA for 2023 was 8.7%, one of the largest in decades. 2025 will likely have a substantial increase, just not that substantial. 

Retirees shouldn’t expect such a massive increase, which may not be great for those struggling with costs. But you should expect to see something. 

The impact of these adjustments can be especially significant for those who rely heavily on Social Security as their primary source of income. Even a small COLA increase can make a big difference in covering day-to-day expenses for many low-income retirees.

COLA also doesn’t track what seniors are experiencing directly. It doesn’t consider regional variations or specific expenses seniors tend to spend more on, like healthcare. 

While these benefit increases provide short-term relief, they also create additional strain on the long-term sustainability of the Social Security program.

How COLA Helps Beneficiaries

For those receiving Social Security, the expected COLA increase in 2025 can seem like a dream come true. Prices are continuing to rise due to inflation, and these tend to have the biggest impact on low-income individuals, like retirees. Sadly, around one in 10 seniors currently live in poverty, and a COLA increase can seriously help them out. 

For low-income retirees, even a small percentage increase in their monthly check can mean better financial security. It makes it easier for them to afford essentials like food, housing, and healthcare. Higher benefits give recipients more purchasing power, allowing them to combat rising costs. 

COLA is made to help retirees purchase the same stuff they did last year despite rising prices. 

All that said, it’s important to realize that COLA isn’t perfect. It doesn’t track what seniors tend to spend money on, specifically. If inflation rises faster than anticipated or certain costs, like healthcare, continue to outpace general inflation, even higher COLAs may still leave some retirees struggling. 

COLA is also necessarily predictive. It tries to predict the costs in the next year, but no predictive algorithm is perfect. 

Still, some increase is better than no increase!

The Challenge of Social Security’s Sustainability

There is another side of the coin, though. While recipients are likely pleased with the rise of Social Security benefits in 2025, that also means the program requires more funding. 

The Social Security program is primarily funded through payroll taxes, where current workers contribute to support retirees’ benefits. However, as the population ages and more individuals retire, the worker-to-beneficiary ratio has steadily declined. There are simply fewer people paying into the pot and more people taking from it. 

As you might guess, this puts the program in a tough spot. 

According to the Social Security Administration, the program’s funding is likely to run out by the mid-2030s if no changes are made to the program. Once this occurs, the system could only pay out about 75% of scheduled benefits, relying solely on incoming payroll taxes.

Most experts expect COLA increases to be the norm for the next several years, which will only accelerate Social Security’s funding problem. 

There is a serious challenge of balancing the financial needs of seniors with the sustainability of the program. As benefit payouts rise, pressure mounts to lower benefits to prevent funding gaps. 

Potential Policy Solutions and Reforms

Due to this solvency problem, there is a chance that we’ll see reforms regarding Social Security discussed in 2025. In all likelihood, these reforms will not affect Social Security in 2025, but they may go into effect in 2026 or 2027. 

One widely discussed option is raising the payroll tax cap. Only income up to a certain limit is subject to Social Security taxes. Raising that limit would mean that higher-income individuals would contribute more to the system, helping fund the program.

It’s also possible that retirement age may be increased. However, there is already currently a program in place to slowly increase the retirement age. That could be expanded or sped up, but it’s unlikely it would change altogether. 

Another potential reform is adjusting the benefit formula, particularly for wealthier recipients. Currently, Social Security has no income cap. Everyone receives it. However, that could change by reducing benefits if annual income reaches a certain amount. 

Raising payroll tax rates across the board is also an option, though it’s less popular due to its impact on workers and employers. No one wants to pay more taxes, after all. 

None of these reforms are set in stone, especially in an election year. However, the next administration will need to deal with Social Security’s funding problem head-on, especially as COLA slowly increases the program’s funding needs. 

What This Means for Future Retirees

Even if you aren’t claiming Social Security yet, all of this information still matters. Future retirees should be proactive about planning for retirement, which means staying on top of Social Security. 

Diversifying your income during retirement is vital, given that Social Security’s solvency is in question. Relying on Social Security alone is not a reliable strategy these days. Be sure to invest in other retirement savings options, like 401(k) plans, IRAs, and savings accounts. 

You should also stay informed about potential changes to Social Security. Legislation could impact your taxes now and affect what you receive later. You may need to adjust your plan to take these considerations into account. 

Planning early in your life is always beneficial, but even someone who’s only a decade away from retirement will benefit immensely from taking some proactive steps now, like investing in a 401(k) plan. 

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