•Low hippocampal volume is associated with low memory in aging.•Hippocampal functional redundancy mediates the volume-memory relationship.•Hippocampal local efficiency is not related to volume-memory association.•Low hippocampal volume, redundancy, and memory predict future dementia conversion. Hippocampal neurodegeneration, a primary component of Alzheimer's disease pathology, relates to poor cognition; however, the mechanisms underlying this relationship are not well understood. Using a sample of cognitively normal older adults and individuals with mild cognitive impairment, this study aims to determine the topological properties of functional networks accompanying hippocampal atrophy in aging, along with their association to cognition and clinical progression. We considered two conceptually differing topological properties: redundancy (the existence of alternative channels of functional commutation) and local efficiency (the efficiency of local information exchange). Hippocampal redundancy, but not local efficiency, mediated the association between low hippocampal volume and low memory in both the whole sample and in ß-amyloid positive participants. Additionally, participants with high hippocampal volume, redundancy, and memory clustered separately from those with low values on all three measures, with the latter group showing higher conversion rates to dementia within three years. Together, these results demonstrate that reduced hippocampal redundancy is one mechanism through which hippocampal atrophy associates with memory impairment in healthy and pathological aging.