The Social Security Cost-Of-Living Adjustment (COLA) may be lower in 2025, which is good news! Find out why!
Social Security is a crucial source of income for many retirees. According to the Social Security Administration, about half of households with someone aged 65 or older rely on it for at least 50% of their income. And even with this program, retirees are still feeling the impact of higher prices. However, the Social Security Cost-Of-Living Adjustment (COLA), which helps offset inflation, may be lower next year.
The COLA increases monthly benefits based on the rise in prices during the third quarter of each year. Although the third quarter for 2024 hasn’t arrived, analysts are already estimating the COLA for next year and there is good news!
The Senior Citizens League, after analyzing the latest consumer price index (CPI) data from May, predicts a 2.57% increase in Social Security checks for 2025. This is a slight drop from their earlier forecast of 2.66% and is lower than the 3.20% COLA given this year. Fortunately, a lower COLA might be beneficial for retirees.
Mary Johnson, an independent Social Security and Medicare policy analyst, also predicts a drop. She pointed out that, with inflation rates slowing down, the estimated COLA for 2025 is expected to be around 3%, which is significantly lower than the 8.7% COLA in 2023 and the 5.9% adjustment in 2022, as a response to record-high inflation.
Social Security Cost-Of-Living Adjustment
The adjustments are based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The Social Security Administration compares the CPI-W data from the third quarter of the current year to the third quarter of the previous year. If there is an increase, the COLA reflects that percentage. So, it’s essentially based on past inflation, making it reactive rather than proactive. This means that during high inflation periods, seniors may find their benefits stretched thin.
A high COLA indicates high inflation, which reduces the value of Social Security benefits. Since 2000, the average retiree’s cost of living has increased much faster than their Social Security benefits, resulting in a 36% loss in purchasing power, according to The Senior Citizens League.
Conversely, low and stable inflation is advantageous. When the COLA was below 3% since 2010, the buying power of Social Security improved most of the time. Specifically, benefits increased by a cumulative 13% in years when the COLA was under 2%.
The recent CPI-W data provides insight into why the expected COLA for 2025 is lower. Certain categories saw significant price drops compared to two years ago as of May. Fuel oil prices decreased by 35.3%, airline fares by 19.4%, and gasoline by 17.7%.
Taxes vs. Social Security Benefits
A high COLA can also increase the tax burden on Social Security benefits. These taxes are based on combined income, which includes half of your Social Security benefits, your adjusted gross income, and any non-taxable interest income. As benefits rise, so does your combined income, potentially increasing the taxable portion of your benefits. Here’s how much of your Social Security benefits might be taxed based on your combined income and filing status:
| Taxable Percentage of Benefits | Combined Income (Individual Filer) | Combined Income (Joint Filer) |
|---|---|---|
| 0% | Less than $25,000 | Less than $32,000 |
| Up to 50% | $25,000 to $34,000 | $32,000 to $44,000 |
| Up to 85% | More than $34,000 | More than $44,000 |