For retirees, the annual cost of living adjustment (COLA) to social security payments is a very hot topic, and one that certainly is worth paying attention to. Every year, the Social Security Administration (SSA) suggests an inflation-linked increase to social security for seniors. Using a so-called COLA indicator, various factors including the CPI report are used to calculate the rise in payments made to seniors on a year-over-year basis.
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Given the fact that the CPI has been rising at a much slower rate (which is great for the fight for lower interest rates, but not so great for seniors), many expect a more modest benefit increase this coming year. That said, there is some uncertainty with respect to the exact number that will be announced, as the final COLA figure for 2025 will be based on CPI-W changes from July – September, which will come out in October.
For those curious as to where next year’s COLA adjustment will come in at, let’s dive into the information at hand what the experts suggest could be on tap for 2025.
Key Points About This Article:
- Retirees who are reliant on social security payments pay extra attention to the newsflow in October, when the cost of living adjustment (COLA) is announced for the following year.
- Here’s where the market and experts believe next year’s COLA will come in at, and what seniors may want to make of this more modest increase.
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Projected Cost of Living Adjustment for 2025
The 2025 COLA has consistently been revised lower, according to analyst expectations. Since this adjustment is based on inflationary factors, the Federal Reserve’s interest rate hiking cycle and the disinflation we’ve seen within the economy should bleed into a more modest increase, with many expecting the number to come in around 2.5% next year. This increase will mean an extra $48 (approximately) will go into seniors’ pockets if approved, though there’s always the potential for a hotter-than-expected upcoming CPI report that could lead to a slightly higher COLA for 2025.
Given the fact that July – September inflation data are used to calculate this increase, seniors are likely to see a lower increase than they may have if earlier year data was used for the calculation. While that’s disappointing for many, the 2023 outsized COLA increase of 8.7% certainly helped out millions of households traverse higher inflationary pressures for their essential goods.
COLA and Inflation
While many experts suggest a COLA increase of around 2.5% is in the cards, many have clearly been hoping for an increase closer to last year’s 3.2% adjustment. The downside of inflation coming down is that seniors bear the brunt of this move, though last year’s increase and this year’s projected increase are on par with historical averages.
The COLA is based on third-quarter CPI-W data, and retirees’ net benefits may be impacted by taxes and Medicare Part B premiums. Up to 85% of Social Security benefits can be taxed based on combined income, which includes half of the benefits, total adjusted gross income, and nontaxable interest. As these thresholds remain unchanged, more beneficiaries may face taxes over time. Former President Trump has proposed eliminating these taxes as part of his campaign, aiming to “help seniors on fixed incomes” by removing taxes on Social Security benefits.
We’ll have to see how the Harris administration potentially responds to these moves, given how important the senior population is politically. The potential for individuals with a combined income between $25,000 and $34,000, or $32,000 and $44,000 for married couples to potentially face taxes on up to 50% of their benefits is likely to continue to be a hot-button issue, as well as how inflation is ultimately calculated.
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What This Means for Retirees
The cost of living increases that are put forward each year are intended to help keep seniors’ spending ability on par with how quickly prices are rising over time. There are debates over how CPI is calculated, with some seniors reporting they’re still falling behind despite these increases. But the goal is to maintain the standard of living middle class Americans should be owed after a lifetime of service to the country, and that’s a promise each of us want to see delivered on when it’s our time to age into retirement.
Issues around how the trust supporting these SSA distributions is funded remain, and there are plenty of issues with respect to a funding gap that need to be sorted by future administrations. For decades, these issues have been kicked down the road, though with 10,000 baby boomers aging into retirement on a daily basis, these discussions are likely going to need to happen sooner.
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For 2025, seniors can expect a COLA of around 2.5%, give or take a few basis points. That’s not much.
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