2025 Social Security Cost-of-Living Adjustment : Low Inflation Numbers Could Benefit Retirees
Social Security is a crucial lifeline for many retirees. About half of households with someone age 65 or older receive at least 50% of their income from Social Security, according to data from the Social Security Administration. Without it, millions of seniors would be living in poverty.
Importance of the Cost-of-Living Adjustment (COLA)
Many seniors rely on Social Security for their living expenses, making the annual cost-of-living adjustment (COLA) a critical part of their benefits. Beneficiaries receive an increase in their monthly checks based on the price increases in the third quarter of the previous year. While the third quarter of 2024 hasn't arrived yet, analysts are already making predictions about the COLA for 2025.
Following the most recent consumer price index (CPI) reading from May, The Senior Citizens League updated its forecast, expecting a 2.57% bump in Social Security checks next year. This is down from the previous outlook of 2.66% and significantly below the 3.20% COLA received this year. However, a lower COLA might be a pleasant surprise for retirees. n – 2025 Social Security Cost-of-Living Adjustment
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The Biggest Challenge for Social Security
A higher-than-average COLA indicates higher-than-average inflation, which can be detrimental to the value of Social Security. High inflation erodes the purchasing power of benefits. The average retiree who started receiving benefits in 2000 has seen their cost of living increase significantly faster than their monthly checks, losing about 36% of their purchasing power, according to The Senior Citizens League. This has been exacerbated by high inflation in recent years.
The Social Security Administration calculates the annual COLA based on past inflation rates, making it backward-looking. Since future inflation is unpredictable, the SSA adjusts payments based on how much living expenses climbed the previous year. This means seniors have to stretch their benefit checks during high inflation periods.
Low and stable inflation is beneficial for Social Security recipients. The buying power of Social Security improved most of the time when the COLA was less than 3% since 2010. In years with a COLA of less than 2%, the buying power improved by a cumulative 13%.
Impact of Low Inflation on Social Security
Low inflation numbers should ultimately benefit retirees by maintaining the purchasing power of their Social Security benefits. Here is a summary of how the COLA and inflation affect Social Security buying power: — 2025 Social Security Cost-of-Living Adjustment
Year | COLA | Buying Power Change |
---|---|---|
< 2% | +13% | |
2%-3% | Stable | |
> 3% | Decline |
Taxation of Social Security Benefits
Another challenge with a high COLA is the taxation of Social Security benefits. Social Security income is taxed based on a metric called combined income, which includes half of your Social Security benefits plus your adjusted gross income and any non-taxable interest income. As Social Security benefits increase, combined income rises, potentially making more of your benefits taxable. —– 2025 Social Security Cost-of-Living Adjustment
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 |
These thresholds haven't been updated in over 30 years and lack inflation adjustments. As benefits increase, more seniors face higher tax bills. A low COLA can help keep more of your Social Security benefits untaxed. — 2025 Social Security Cost-of-Living Adjustment
Where Will the 2025 COLA Land?
The CPI numbers for May were better than expected, leading The Senior Citizens League to lower its forecast. However, there is still time before the end of the third quarter, and other experts are uncertain about inflation trends.
The Federal Open Market Committee (FOMC) is closely watching inflation trends, aiming to reduce inflation to 2%. Fed Chairman Jerome Powell indicated the possibility of only one interest-rate cut before the end of the year, suggesting cautious optimism about inflation trends. – 2025 Social Security Cost-of-Living Adjustment
While the May CPI reading was favorable, inflation still rose 3.3% year over year. The Senior Citizens League's forecast suggests minimal price changes from May to September, which seems unlikely but possible.
Regardless, there's a good chance the 2025 COLA will be below 3%. This lower adjustment could mean an increase in the purchasing power of Social Security checks for retirees.
Conclusion
The 2025 Social Security COLA is expected to be lower than previous years, which could benefit retirees by preserving the purchasing power of their benefits. Low inflation numbers should ultimately provide financial relief for seniors. – 2025 Social Security Cost-of-Living Adjustment
What is the 2025 Social Security Cost-of-Living Adjustment?
The 2025 COLA is expected to be around 2.57%, lower than the previous year's 3.20%
How does low inflation benefit Social Security recipients?
Low inflation helps maintain the purchasing power of Social Security benefits, as higher inflation erodes value.
How is Social Security income taxed?
Social Security income is taxed based on combined income, which includes half of Social Security benefits plus adjusted gross income and any non-taxable interest income.
What is the impact of a high COLA on Social Security benefits?
A high COLA can lead to higher combined income, making more of the benefits taxable. Low COLA can help keep more benefits untaxed.
What are the current taxable thresholds for Social Security benefits?
For individual filers, up to 50% of benefits are taxable for combined income between $25,000 to $34,000, and up to 85% for income above $34,000. For joint filers, these ranges are $32,000 to $44,000 and above $44,000, respectively.