social Security Social Security has become a significant part of many seniors’ retirement budgets. In the annual Gallup survey, 60% said Social Security is a major source of income, the highest level in more than a decade. Another 28% said it is at least a minor source of income in retirement.
Since many seniors depend on Social Security to make ends meet, the annual cost-of-living adjustment (COLA) is very important to them. Beneficiaries receive an increase in their monthly check every year based on the average year-over-year inflation in July, August and September. We’re about a month away from getting the first set of data that will be used in calculating retirees’ COLA, but analysts are already making their best guesses about where it might land.
After June consumer price Index The Senior Citizens League has updated its forecast, based on the (CPI) reading. Despite inflation coming in lower than expected last month, the group has raised its expectations to a 2.63% COLA, up from 2.57% the previous month.
Senior citizens may be disappointed that the forecast is much lower than expected. This year he received a 3.2% COLAThat’s especially true as Social Security becomes an increasingly important part of their budgets, while inflation erodes their purchasing power. But the Senior Citizens League’s forecast is actually very good news for retirees.
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The biggest problem facing senior citizens dependent on social security
The annual cost-of-living adjustment can be a double-edged sword for retirees. Since the COLA is based on inflation, it only increases significantly when inflation rises significantly. And high inflation rates have been extremely damaging to seniors’ retirement budgets.
The average retiree who began receiving benefits in 2000 saw his or her cost of living rise much faster than his or her Social Security check. The Senior Citizens League estimates that benefits have effectively lost 36% of their purchasing power. Higher inflation rates in 2021 and 2022 led to bigger COLAs, but also a bigger drop in how much seniors can spend from their Social Security income.
But not all inflation is bad for seniors. In fact, a healthy economy has slow and steady growth money supplyresulting in a modest level of inflation. federal ReserveThe government, which indirectly controls the money supply, currently aims to bring inflation to 2% while maintaining full employment.
When you look at the recent history of Social Security COLAs and their effect on retirees’ purchasing power, lower COLAs usually benefit seniors. Since 2010, Social Security’s purchasing power has improved most of the time when the COLA is less than 3%. During the periods when the COLA was less than 2%, purchasing power improved cumulatively by 13%.
Therefore, the expectation of a mere 2.63% COLA is good news for retirees.
Many retirees won’t be able to keep their full COLA
Another problem with higher cost-of-living adjustments is that they don’t take into account taxation on Social Security income. A larger Social Security check will often result in a larger tax bill.
The way the government taxes Social Security is based on a metric called combined income. Combined income equals half of your Social Security income, plus your income. adjusted gross incomePlus any tax-free interest income. So, all else being equal, an increase in your Social Security income results in an increase in your combined income, and more of your benefits may be taxable as a result.
Here’s how much of your Social Security income might be taxable, based on your combined income and filing status.
Taxable percentage of profit | Combined Income (Single Filer) | Combined Income (Joint Filers) |
|---|---|---|
0% | Under $25,000 | Under $32,000 |
up to 50% | $25,000 to $34,000 | $32,000 to $44,000 |
Up to 85% | Over $34,000 | Over $44,000 |
Data source: Social Security Administration.
If these limits seem low, it’s because they haven’t been updated in more than 30 years. There’s no inflation adjustment in the system, so each year, more and more retirees see a larger portion of their benefits taxed by the federal government as the COLA increases their combined income. Many states, however, Exempt Social Security Income from taxation.
A lower COLA means seniors get a higher share of their benefits.
How big will the 2025 COLA be?
Recent CPI data for May and June came in better than expected. If inflation remains steady through the third quarter, the COLA will be just 2.3%. More likely, we’ll see inflation of 0.1% to 0.2% each month, resulting in a COLA between 2.5% and 2.7%, which is in line with the Senior Citizens League’s forecast.
Inflation would have to average close to half a percent per month over the next three months to reach the 3.2% COLA announced last October. That seems highly unlikely to happen without some major disruption.
We’re already in mid-July. The 2025 COLA picture is starting to become a lot clearer. In a few months, the number will be determined, and it’s very likely that it will come in below 3%. While this may be a decrease compared to the past few years, retirees should be happy with the lower COLA and declining inflation. This means they’re more likely to see an increase in the purchasing power of their Social Security checks next year.
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