The cost-of-living adjustment (COLA) significantly impacts Social Security benefits, making it a crucial issue for retirees and beneficiaries. The Senior Citizens League (TSCL) has recently provided updated estimates, suggesting the COLA for 2025 could be between 2.6% and 3%. While this is less than the 3.2% COLA for 2024, there are several reasons why retirees should embrace the new, lower boost.
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COLA Forecast
The TSCL’s forecast for price increases from May to September has been revised downward due to higher-than-expected CPI data. Economists are wary of ongoing inflation, which rose 3.3% year-on-year. However, the COLA for 2025 is expected to be less than 3%, meaning retirees’ purchasing power from Social Security income is more likely to increase.
Lower COLA Benefits
A higher-than-average COLA often indicates higher-than-average inflation. Inflation has already eroded the purchasing power of Social Security benefits. For retirees who began receiving benefits in 2000, the cost of living has risen much faster than monthly payouts, reducing their purchasing power by nearly 36% according to the TSCL. High inflation in recent years has exacerbated this problem.
The SSA calculates annual COLAs based on past cost-of-living increases, leading to stretched benefits during high inflation periods due to the unpredictability of future inflation. However, Social Security beneficiaries benefit more from low and steady inflation. Since 2010, purchasing power has generally increased when the COLA was less than 3%. When the COLA was below 2%, purchasing power increased by 13% in total. A gradual increase in annual benefits is more beneficial for seniors.
Taxation Concerns
Higher COLA can also negatively impact Social Security benefit taxation. The combined income measure determines how Social Security income is taxed. Combined income equals adjusted gross income (AGI) plus non-taxable interest income plus half of Social Security benefits.
As combined income increases with higher benefits, more benefits may become taxable. The following table shows the taxable percentage of benefits based on filing status and combined income:
| Taxable Percentage of Benefits | Combined Income (Individual) | Combined Income (Couples) |
|---|---|---|
| 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, unchanged for over 30 years, do not account for inflation. As benefit checks grow, the taxable thresholds remain fixed, leading to higher taxes for seniors. A lower COLA allows retirees to keep more of their Social Security benefits without paying taxes.
In summary, while a lower COLA might initially seem less favorable, it often results in better purchasing power and lower taxes for Social Security beneficiaries. By Knowing the broader implications, retirees can appreciate the benefits of a moderate COLA increase and plan their finances accordingly.
FAQs
What is the expected COLA for 2025?
The COLA for 2025 is estimated to be between 2.6% and 3%.
How does COLA affect Social Security benefits?
COLA adjusts benefits annually based on inflation to maintain purchasing power.
Why is a lower COLA beneficial?
A lower COLA often means lower inflation, maintaining better purchasing power and reducing tax liabilities.
How are Social Security benefits taxed?
Benefits are taxed based on combined income, which includes AGI, non-taxable interest, and half of Social Security benefits.
How can I maximize my Social Security benefits?
Delaying retirement until age 70 can significantly increase your monthly payment.