Beneficiaries are divided as Social Security’s cost-of-living adjustment for 2025 could be the lowest in five years. This change in pattern breaks the following three years of above-average cost-of-living adjustments (COLAs). According to a Senior Citizens League analysis, the cost-of-living adjustment for Social Security beneficiaries in 2025 may be as low as 1.4%, down from 3.2% last year and the lowest since 2020.
The average monthly Social Security payment received by almost 50 million retired workers as of January was $1,909. Social Security benefits help lift almost 15 million seniors 65 and older out of poverty each year, even if they do not make retirees wealthy.
Moreover, the vast majority of retirees rely on their monthly income to cover their expenses. Over two decades of yearly surveys conducted by national pollster Gallup have revealed that between 80% and 90% of retirees at that time depended on their Social Security payment to some extent to pay for their living expenses.
Considering the importance of Social Security to the retirement income of older Americans, the Social Security Administration’s (SSA) annual cost-of-living adjustment announcement is undoubtedly the most anticipated event.
The reason behind the lowest COLA adjustment in the last five years
The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is the main element influencing COLA. The COLA adjustment will be lower than expected if the CPI-W indicates a low rate of overall inflation. There are several potential causes for this, including slowdowns in the world economy, rising productivity, and stable energy prices.
The United States inflation for December was set at 3.3%, which is marginally higher than Social Security’s projected 3.2% COLA for 2024. As the year goes on, the COLA projection for 2025 could fluctuate. It will not be official until October when the COLA for the following year is announced.
According to Social Security, half of all Americans 65 and older reside in homes where Social Security provides at least 50% of their income. Roughly 25% of elderly households get at least 90% of their income from Social Security. Although COLA is not a raise but rather a benefit adjustment for inflation, it can be beneficial to the approximately 67 million people who receive Social Security benefits.
Medicare could erode COLA’s 2025 forecast
A retiree’s Social Security check is automatically reduced to fund the premiums for Medicare Part B, which includes outpatient hospital services, physician services, durable medical equipment, and other medical and health services not covered by Medicare Part A. In 2024, Medicare Part B will cost $174.70 per month, up 5.9% from $164.90 in 2023.
The Senior Citizens League’s Mary Johnson, a policy analyst for Social Security and Medicare, issued a warning that the 8.7% COLA for 2023 may have an impact on Social Security recipients’ taxes in the upcoming tax season. Mary Johnson also highlighted that as Social Security income rises, more beneficiaries will pay taxes on their benefits this tax season, and that in 2024, taxes will take up a larger share of Social Security checks.
The program’s fixed-income thresholds are the reason why more beneficiaries are being taxed. The income limits that trigger taxes on Social Security benefits have not been updated for inflation since the tax’s implementation in 1984, she noted, in contrast to federal income tax brackets.
Many analysts have warned about the challenges Social Security has been facing over the last few years. It is expected that Social Security’s trust fund will run out of money by 2033, therefore, unless something is done to save it, payouts for both present and future claimants will be cut by 23%.