The Cost of Living Adjustment (COLA) is a crucial subject for retirees and Social Security beneficiaries, as it determines the annual increase in Social Security benefits. Recently, the Senior Citizens League (TSCL), one of the largest nonpartisan senior groups in the nation, released new projections for the 2025 COLA.
According to these projections, the COLA for 2025 is expected to be between 2.6% and 3%, a decrease from the 3.2% COLA set for 2024. Although this may not meet the expectations of many seniors, there are reasons why this lower adjustment might actually be beneficial.
Retirees’ Perspective
A higher-than-average COLA often signifies higher-than-average inflation. High inflation erodes the value of Social Security benefits, reducing their purchasing power. For instance, the purchasing power of retirees who began receiving benefits in 2000 has decreased by nearly 36% due to inflation. This is significant because the Social Security Administration (SSA) calculates COLA based on past living expenses, making it challenging for seniors to stretch their benefits during periods of high inflation.
Interestingly, when inflation is low and stable, Social Security’s purchasing power tends to increase. Since 2010, there have been periods where COLA was less than 3%, resulting in a cumulative 13% increase in purchasing power. Therefore, a gradual rise in benefits, even with a lower COLA, can be advantageous for retirees.
Tax Implications
Another factor to consider is the taxation of Social Security benefits. A high COLA can increase retirees’ combined income, making a larger portion of their Social Security benefits taxable. The combined income metric, which includes adjusted gross income (AGI) plus non-taxable interest and half of Social Security benefits, determines the taxable percentage. Here’s a breakdown:
| 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 have not been adjusted for over 30 years, failing to account for inflation. As benefits increase, so does the taxable income, leading to higher taxes for seniors. A lower COLA can help retirees avoid higher taxes, allowing them to retain more of their Social Security benefits.
Projections for 2025
The Senior Citizens League’s predictions are influenced by recent higher-than-expected Consumer Price Index (CPI) statistics, which showed a 3.3% year-over-year increase. This suggests that inflation may not decrease significantly, leading to a likely COLA below 3% for 2025. Although this is lower than the 2024 adjustment, it could actually help preserve the purchasing power of Social Security benefits, providing a more stable financial situation for retirees.
Positive Outcomes
While a lower COLA might initially seem disappointing, it offers several advantages. Lower inflation means that the real value of Social Security benefits is more likely to remain stable or even increase. Retirees can enjoy a better balance between their income and living expenses, without the strain of high inflation.
FAQs
What is the projected COLA for 2025?
The projected COLA for 2025 is between 2.6% and 3%.
How does a lower COLA benefit retirees?
A lower COLA can preserve purchasing power and reduce taxable income.
Why are COLA thresholds not adjusted for inflation?
The thresholds haven’t been revised in over 30 years, ignoring inflation.
What is the impact of high inflation on Social Security benefits?
High inflation reduces the purchasing power of Social Security benefits.
Will a lower COLA mean less money for retirees?
Not necessarily; it can help maintain the real value of benefits.
