Social Security to Increase by 2.5% for 2025: What Retirees Should Know

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Inflation has more or less finally been tamed. That’s the main takeaway from Social Security’s 2025 cost-of-living adjustment, announced by the Social Security Administration earlier this month.

A financial advisor can help you build an income plan for retirement and decide when to claim Social Security. Find an advisor today.

Every year the SSA adjusts monthly Social Security payments to keep up with overall inflation. The agency makes this adjustment in the third quarter, announcing each the fall rate increases that will kick in the following January.

While inflation dropped to 2.4% in September, the SSA will increase payments by 2.5% in 2025. For example, for every $100 a retiree received in 2024 they will receive $102.50 in 2025.

The rate increase will bump the average Social Security retirement benefit from $1,873 per month (as of September 2024) to $1,919 in 2025. (Although readers should note that average Social Security benefits may also fluctuate due to a variety of external circumstances.) For most retirees, this increase will begin with their first benefits payment in January 2025. For SSI recipients, this increase will begin with their last payment in December 2024.

The rate increase will coincide with the SSA’s annual income cap increase. Effective January 2025, earnings of up to $176,100 will be subject to the Social Security tax. This is an annual increase, again, to keep up with inflation. As always, earnings above the cap are not subject to the Social Security tax, meaning that this tax effectively decreases with additional earnings.

Social Security benefits are increased based on the Consumer Price Index as calculated by the Bureau of Labor Statistics. Specifically, the SSA uses a figure known as the CPI-W (the Consumer Price Index for Urban Wage Earners and Clerical Workers). This is an inflation index that has more upward pressure, since it measures price changes in more expensive urban areas.

The purpose of this annual rate increase is to eliminate a form of longevity risk brought on by inflation. Inflation can erode the spending power of stagnant savings. Even at the Federal Reserve’s target rate of 2%, prices will double roughly every 35 years. For an ordinary retiree, without some offsetting increase, this means that a steady retirement income can effectively halve over the course of even a moderately long lifetime.

While inflation has been quite low for most of the 21st Century, recent years have reminded Americans that it can be very real. In 2021 and 2022, in fact, high inflation triggered some of the largest benefit increases ever. In those years, the SSA increased payments by 5.9% and 8.7%, respectively. In 2024, benefits rose just 3.2%.

This rate increase is known as the COLA (cost-of-living adjustment). It’s designed to offset the inflation-related longevity risks for Social Security payments. That said, retirees should remember that this helps only with their Social Security benefits. It’s essential to include inflation planning in your private savings as well. A good retirement account needs some modest growth to offset price increases, otherwise even a steady income will effectively decline year-over-year.

And if you need help creating a retirement plan designed to meet your needs, consider speaking with a financial advisor to see how they can assist.

For retirees, no action is necessary.

The SSA applies its benefit increase automatically each year. The COLA will be reflected in the first applicable monthly benefits check. You will also receive a letter in the mail notifying you of the rate increase, and you can check your benefits via mySocialSecurity online.

The annual COLA is also not the only way to increase your Social Security benefits. If you continue to work after taking benefits, the SSA will continue tracking your applicable earnings each year. If these earnings increase your Social Security credits and applicable benefits, the agency will adjust your payments accordingly. This can be particularly useful for retirees with fewer than 35 years of earnings or particularly low-earning years during their working life.

A financial advisor can help you plan for Social Security and integrate your benefits into a retirement income plan that corresponds with your assets and spending needs.

The Social Security Agency has announced its annual benefit increase. This COLA – 2.5% – will be significantly smaller than it was in 2021 and 2022, when high inflation was raging. This signals that inflation has finally returned to more normal levels.

Increasing your Social Security benefits isn’t a pipe dream. There are strategic moves you can make to ensure you get the most out of your benefits. Here are four ways that you can increase them.
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