As the new year approaches, millions of retirees who depend on Social Security are eagerly anticipating the cost-of-living adjustment (COLA), which will determine the amount of their payments that will go up. After a few years of big price rises due to inflation, 2025 is expected to see a much smaller change.
New figures say that the rise could be around 2.5%, which would be the lowest rate since 2021. This number is based on how inflation is changing right now. It’s not official yet, but retirees are already worried about it.
Why is a 2.5% increase expected for retirees?
In the past few years, there have been big changes to Social Security payments. For example, there was a huge 8.7% rise in 2023, the biggest in over 40 years. This was caused by the sharp rise in prices after the pandemic. Even though the rise in 2024 was only 3.2%, it still showed that the effects of inflation were still being felt.
The recent drop in inflation statistics is the main reason for the expected 2.5% rise in 2025. The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the third quarter is used to figure out the COLA.
The CPI-W is a subset of the larger consumer price index. This measure tracks changes in the wages that workers get paid. It shows that inflation is still happening, but not as fast as it was in the past few years.
What does this mean for retirees?
Compared to other changes that have been made recently, a 2.5% rise may not seem like much, but it’s important to keep it in perspective. The increase of 8.7% in 2023 was a unique reaction to a unique economic situation.
The changes were less drastic in earlier years. In 2021, for example, the rise was only 1.3%. If the 2.5% estimate for 2025 comes true, it will be more in line with the average for the past few years.
Even a small raise can make a big difference for retirees who live on fixed means. A smaller increase in 2025 could make it harder for people who count on Social Security benefits to cover their basic living costs to keep up with the prices of goods and services that they need.
The impact of inflation on retirees’ incomes
Even though inflation has slowed down in recent months, it is still a major issue that affects seniors’ finances. When prices go up, it gets harder for adults who depend on Social Security to buy things. The COLA is very important because it helps benefits keep up with the cost of living.
In years with a lot of inflation, like 2023, a big change can help for a while. But a lot of retirees think that their wages don’t go up enough to fully cover the rising cost of living, even with these changes. Costs like health care, which tend to rise faster than other costs, are still a big problem.
Taxes and Medicare premiums: what reduces the net increase
It’s important to remember that the COLA doesn’t always mean a big net raise for retirees. A lot of things, like taxes on benefits and Medicare payments, can make these changes less important.
Depending on how much money the retiree makes all together, up to 85% of their Social Security payments may be taxed by the federal government. This amount of money includes half of your Social Security payments, your adjusted gross income, and any interest that is not taxed.
The more money that is made together, the more of the rewards are taxed. Also, Medicare Part B premiums, which pay for medical care, tend to go up every year, which cuts into the net benefit rise even more.
This means that even if retirees see a 2.5% COLA adjustment in their Social Security payments, the actual impact on their take-home income could be smaller once these additional costs are factored in.
Trump’s proposal to eliminate Social Security benefit taxes
Former President Donald Trump’s plan to get rid of taxes on Social Security payments has been a topic of discussion in recent months. During his campaign, Trump said again that he would make it easier for retirees to pay their bills by getting rid of these taxes. This could help a lot of people.
Right now, people who get benefits and whose total income is between $25,000 and $34,000 (for single filers) or $32,000 and $44,000 (for joint filers) may have to pay taxes on up to half of their benefits. If they make more than these amounts, up to 85% of their rewards may be taxed.
But Trump’s plan has been criticized as well. The Committee for a Responsible Federal Budget says that getting rid of these taxes could lead to gaps in the trust funds for Social Security and Medicare, which would cost between $1.6 and $1.8 trillion by 2035.
What can we expect from the official announcement in October?
In October 2024, after collecting all of the inflation data for the third quarter, the Social Security Administration will publicly announce the COLA. The latest estimate is for a 2.5% rise, but this number could change based on the inflation numbers from September.
It’s possible that the adjustment will be a little higher or lower, but most experts say that it won’t be as big of a jump as the last two years. This is because inflation is going down more slowly, but for retirees who are already having a hard time with money, any slowdown in the adjustment may be a cause for worry.