Every month, payouts from Social Security Insurance (SSI) are a very important source of income for 68 million Americans. An overwhelming majority of retirees—58%—rely on Social Security to keep their finances stable during their golden years.
It is very important that these funds keep their value over time because they are used to cover basic living costs. This is especially true during times of persistent inflation.
The federal government uses a Cost of Living Adjustment (COLA) to make sure that inflation doesn’t make Social Security payouts less valuable. With this change, the benefits that seniors get will still be enough for them even if the cost of living goes up.
Long-term inflation has had a big effect on the economy in recent years, which is why the Social Security Administration had to reevaluate and change the COLA more carefully. The COLA is changed once a year, and bigger changes are usually made when inflation lasts for a long time.
In the past, some of the biggest COLA raises happened during tough economic times, like the recessions or times of high inflation in 1979–1981, 1990, 2008, 2022, and 2023. The COLA has gone up a lot over the past few years to help seniors deal with the higher cost of living during economic downturns.
Experts are now keeping a close eye on economic signs because they think that the COLA for 2025, which will be made public in October, could again be very high and set a new record.
The next COLA for Social Security update
The Social Security Administration announced in October 2023 that there would be a 3.2% COLA for the year 2024. This change, which took effect in January 2024, gave Social Security recipients an average raise of $50 per month.
This update not only raised the monthly payments, but it also changed the maximum amount of money that retirees who have not yet hit full retirement age can earn each year.
In particular, the maximum amount of money these people could earn went up to $22,320, and the maximum amount of money they could earn after reaching full retirement age of 67 went up to $59,520. For retirees aged 67 and up, there are no limits on how much they can earn. This means they can work without affecting their Social Security payments.
The rate of pay growth across the country is another thing that affects the COLA. When national wages go up, so does the highest amount of money that is taxed by Social Security. For example, in 2024, the highest amount of money that was taxed went up from $160,200 to $168,600, which shows that wages rose overall.
The COLA could be anywhere from 2.57% to 2.70% in 2025, according to experts. It will depend on how the Consumer Price Index (CPI) changes in the third quarter of 2024. If the COLA gets to 2.7%, it will be the first time in more than 30 years that the change has been 2.7% or higher for four years in a row.
An rise in the COLA has many effects, especially for retirees. One of the best things about Social Security is that it is one of the few ways to get money in retirement that is not affected by inflation. For retirees who count on Social Security as their main source of income, this protection is very important because it helps them keep their independence and quality of life even as costs rise.
Also, people who wait to claim Social Security until they are 67 years old, which is the full retirement age, will get higher monthly payments. A higher Primary Insurance Amount (PIA), an increased COLA, and Delayed Retirement Credits (DRC) can all work together to make their monthly payments much higher.
There are some things that happen when the COLA goes up that aren’t good about having a higher COLA. One example is that when Social Security earnings go up, Medicare premiums usually go up too. The yearly deductible went from $226 to $240, and the monthly Medicare Part B premium went from $164.90 to $174.70 because of the 2024 COLA.
Also, about half of all retirees have to pay taxes on their Social Security payments, and a higher COLA could make the amount of taxes they have to pay go up. So, retirees should carefully think about how the latest COLA affects their overall finances.
For example, they may need to change how much they take out of their 401(k), IRA, and other retirement accounts, and they may also need to make changes to their budgets.
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