In recent years Recipients of social benefits have significant Cost of Living Adjustments (COLA) mainly due to rising inflation. However, the outlook for 2025 suggests that the increase in benefits may be lower than in recent years.
Mary Johnson, an independent analyst specializing in Social Security and Medicare, has presented an estimate based on newly released government inflation data. It predicts that the COLA for 2025, there could only be a 2.5% increase in benefits. This is in contrast to previous years, when benefit recipients received much higher adjustments due to rising inflation rates.
In 2024, the Social Security Administration implemented a 3.2% increase in benefits, affecting over 71 million Americans who rely on Social Security and Supplemental Security Income (SSI). This increase followed an even greater COLA in 2023, when inflation drove the benefit increase to 8.7%, the highest rate in four decades. There was also a significant increase of 5.9% in the previous year, 2022, which was already notable at the time. In 2021, however, the adjustment was much lower at 1.3%. If the 2.5% increase forecast for 2025 comes to pass, this would be a return to a more typical adjustment rate, as Johnson explains.
It is worth noting that the estimate of 2.5% for 2025 COLA can still change. The Social Security Administration will officially announce the increase in October, taking into account inflation data up to September. Johnson believes that the likelihood that the final COLA could be higher than their estimate, and there is about a 13% chance that it could be lower.
The annual COLA is calculated using third quarter data from a specific subset of the Consumer Price Index, known as Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W)This measure tracks the inflation experienced by a demographic segment that includes urban wage earners and office workers and serves as a key measure for calculating adjustments to Social security benefits.
Challenges to Social Security benefits that a higher COLA would not solve
One of the challenges for pensioners in times of high inflation is that the net amount they receive social security can be influenced by factors beyond the COLA. According to the Center for Retirement Research at Boston College, Two main influencing factors are the taxation of Social Security benefits and changes to Medicare Part B premiums. These elements may reduce the value of the increased benefits that beneficiaries could otherwise receive due to COLA.
Social security benefits are often subject to Federal income tax, with up to 85% of benefits being taxable, depending on a person’s income level. This taxation is based on a measure known as “total income,” which is half of the Social security benefitstheir total adjusted gross income and any non-taxable interest they receive. Since the income limits for this tax are not adjusted for inflation, more and more recipients are required to pay taxes on their benefits as their incomes increase due to nominal increases in value resulting from The COLA is rising.
Former President Donald Trump has addressed this issue in his political programme. He called for the abolition of Taxes on social benefits, especially for seniors on fixed incomes. In an article on 9 September about his Social media platform, Truth Social, Trump reiterated his intention to “help seniors on fixed incomes” by supporting the Federal income tax on social security benefitsHis proposal, if implemented, would represent a significant change in the way Social security benefits are taxed and could ease some of the financial pressure on retirees, especially at a time of rising living costs.
Trump’s proposal could appeal to many beneficiaries who feel the burden of these taxes, especially as inflation reduces the purchasing power of their benefits. However, it is important to note that such a change in tax policy would require significant legislative action and agreement in Congress, This can often be a lengthy and contentious process.
