Social Security benefits are set to increase in 2025, and the changes could bring some much-needed relief for retirees. According to early estimates, the cost-of-living adjustment (COLA) for Social Security benefits may rise by about 2.57%. This increase is tied to inflation, which has been cooling down in recent months but still affects the everyday costs that seniors face. If these estimates hold true, the average Social Security recipient, who currently receives around $1,840 per month, could see an additional $47 monthly starting in 2025. This information comes from data released in mid-August 2024, and more official numbers are expected in the coming months.
While the projected increase may sound helpful, some caution is needed. The additional $47 per month might be offset by rising Medicare Part B premiums, which are expected to go up later in 2024. The current estimate is that the premiums could rise from $174.70 to $185 per month. This would reduce the net gain for many retirees. With the COLA increase and Medicare costs factored in, retirees could be left with a net benefit increase of around $37.70 per month, or about $452 annually.
The process of determining the COLA for Social Security benefits is linked to inflation data. The Social Security Administration uses a formula based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to calculate the adjustment. This calculation involves comparing the inflation data for the third quarter (July, August, and September) of the current year with the same period from the previous year. The final COLA figure for 2025 will be announced in October after all the data is in. However, the first clues about the COLA come from the July inflation numbers, which were released by the U.S. Bureau of Labor Statistics in mid-August 2024. Based on these early indicators, experts, including those at the Senior Citizens League and Moody’s, have projected a COLA of around 2.57% to 2.6%.
Many retirees are counting on the COLA to help them cope with the rising costs of living. Inflation, especially in the past few years, has been a significant challenge for those on fixed incomes. A survey conducted by the Senior Citizens League in July 2024 found that 71% of seniors are worried that persistent inflation will drain their savings. The survey, which included responses from over 2,000 seniors, also showed that 78% of participants had seen their monthly expenses for essentials like food, housing, and medicine increase since last year.
Social Security benefits are a critical source of income for many Americans, and the annual inflation adjustment helps to preserve the buying power of these benefits. In fact, Social Security is one of the few retirement benefits that come with an inflation adjustment. While some annuities offer this protection, investors often have to pay extra for it.
The current system of COLA adjustments is designed to provide some protection against rising prices. However, the one-time, annual nature of the adjustment can be problematic, especially during periods of rapidly rising inflation. For example, when inflation surged in 2021 and 2022, retirees had to wait a full year for their benefits to be adjusted, which left many struggling to keep up with their expenses. In 2022, the COLA was 5.9%, and in 2023, it jumped to 8.7%, which was the largest increase since 1981. These large adjustments were necessary to help retirees cope with the steep rise in prices during the pandemic and the subsequent supply chain disruptions.
Even though inflation has moderated in 2024, retirees are still feeling the pinch from higher costs, especially when it comes to housing and healthcare. The delays in receiving COLA increases have left some retirees in a difficult financial position, as they have had to dip into their savings or cut back on essential expenses.
The Social Security Administration has confirmed that individuals are eligible for COLA increases starting at age 62, even if they have not yet begun receiving their benefits. This means that anyone who turns 62 in 2024 will automatically see their future benefits adjusted for inflation, regardless of when they decide to start claiming them. The full retirement age for most people is 67, but benefits continue to increase if you wait until age 70 to begin claiming them.
It’s important to note that some advice floating around online suggests that it might be better to retire in 2024 to lock in that year’s COLA increase. However, experts like Mary Johnson, an independent Social Security and Medicare policy analyst, have debunked this idea. The COLA is automatically factored into the benefit calculation, so there’s no need to retire earlier just to take advantage of it. As long as you are at least 62, your benefits will be adjusted for inflation, whether you’ve started claiming them or not.
For many retirees, Social Security benefits are a lifeline, and the annual COLA adjustments help them maintain their standard of living. However, the rising costs of Medicare premiums and taxes on Social Security benefits can eat into the COLA increase. About 40% of Social Security recipients have to pay income taxes on their benefits, especially if they have additional sources of income, such as part-time jobs or retirement savings. The income thresholds that trigger these taxes have not been adjusted for inflation since they were established in 1983, which means that more retirees are being taxed on their benefits each year.
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For single filers, the threshold for paying taxes on 50% of your Social Security benefits is $25,000 in combined income, while for couples filing jointly, the threshold is $32,000. If your income exceeds these amounts, up to 85% of your Social Security benefits could be taxable. This is a significant issue for retirees, especially those who have worked hard to save for retirement and are now facing higher taxes on their benefits.
As we look ahead to 2025, the projected COLA increase of 2.57% is welcome news for many retirees, but it’s not without its challenges. Inflation has moderated, but prices are still high, and the rising costs of Medicare and taxes will continue to weigh on seniors’ budgets. It’s also important to remember that these estimates are just that — estimates. The final COLA figure for 2025 will depend on the inflation data for the next few months.
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The U.S. Bureau of Labor Statistics will release the inflation data for August on September 11, 2024, and the data for September will be released on October 10. Once all the data is in, the Social Security Administration will announce the official COLA for 2025. Until then, retirees will have to wait and see what the final adjustment will be.
For those who rely on Social Security benefits, the annual COLA is an essential part of maintaining their financial security. It helps protect against the erosion of purchasing power caused by inflation, but it’s not a perfect system. The one-time, annual adjustment can leave retirees vulnerable during periods of high inflation, and the rising costs of healthcare and taxes can further erode the value of the benefits.
As we move into 2025, retirees will need to keep a close eye on the final COLA numbers, as well as any changes to Medicare premiums and tax laws. While the projected increase is smaller than in previous years, it’s still a positive step towards helping retirees maintain their standard of living in the face of rising costs.
