The Social Security Administration is expected to announce a modest cost-of-living adjustment (COLA) for 2025, with current projections suggesting an increase of around 2.57%. This would result in an average monthly benefit increase of approximately $47 for retirees, assuming an average monthly benefit of $1,840. However, this estimate does not account for potential increases in Medicare Part B premiums, which are expected to be announced later this year.
The anticipated increase is relatively modest compared to recent years, reflecting the cooling of inflation over the past year. If this projection holds true, the 2025 adjustment will be lower than the 3.2% increase seen in 2024. The actual figure for 2025 will be determined once additional inflation data becomes available for the months of August and September.
Mark Zandi, Chief Economist at Moody’s, attributed the moderating inflation to the waning effects of the pandemic and geopolitical events that previously drove high inflation. The final figure will be announced by the Social Security Administration in October, after comparing this year’s third-quarter inflation data with that of last year. Social Security benefits vary widely from person to person, depending on factors such as lifetime earnings, years worked, the age at which benefits are claimed, and even the earnings of a spouse or former spouse.
However, one common concern for those who receive benefits is the impact of inflation. In a recent survey conducted by the Senior Citizens League, 71% of respondents identified inflation as a top retirement concern, with 78% reporting higher monthly expenses for necessities like housing, food, and medicine compared to the previous year. The survey also highlighted the challenges faced by retirees during periods of high inflation.
Social Security’s modest 2025 COLA increase
While significant adjustments in recent years have provided some relief, these increases often lag behind actual inflation rates, exacerbating financial strain. Boston University economist Laurence Kotlikoff pointed out the detrimental impact of this lag, stating, “Social Security’s COLA lag means that you are being compensated for inflation that occurred as far back as 15 months.
When inflation was running at 8% a few years back, the lag reduced recipients’ real benefits by roughly 4%. That’s a huge hit.” He suggested that more frequent adjustments throughout the year could better support retirees in managing rising costs. Even with a potential increase, retirees must consider additional costs, such as Medicare Part B premiums.
The Medicare Trustees have forecasted a rise in the Part B premium from $174.70 in 2024 to $185 per month. This $10.30 increase would significantly offset the projected $47 monthly increase, reducing the net benefit gain to around $36.70 a month, or about $440 annually. Moreover, many retirees will see a portion of their Social Security benefits taxed if their income exceeds certain thresholds.
About 40% of Social Security recipients pay taxes on their benefits, with income thresholds for taxation fixed at 1983 levels. These thresholds have not been adjusted for inflation, meaning that more retirees are likely to pay taxes on their benefits as their incomes rise. When determining federal income taxes, retirees must consider their combined income, which includes adjusted gross income, nontaxable interest, and half of their Social Security benefits.
This combined income also accounts for earnings from employment, investment income, and taxable withdrawals from retirement accounts, all of which contribute to the taxable portion of Social Security benefits.
