Social Security is a vital source of income for many retirees, with approximately half of households with individuals aged 65 or older receiving at least half of their income from the program. The annual Cost-of-Living Adjustment (COLA) is a crucial part of Social Security benefits, providing an increase in monthly checks based on inflation rates. The Senior Citizens League recently revised its forecast for the 2025 COLA, predicting a 2.57% increase, down from their previous projection of 2.66%.
The value of Social Security has been negatively impacted by inflation, as the purchasing power of benefits has been eroded over time. Between 2000 and the present, the average retiree has seen a significant increase in living expenses compared to their monthly checks, resulting in a loss of approximately 36% of their purchasing power. This issue is exacerbated by the method used by the Social Security Administration to calculate the COLA, which only takes into account inflation from the previous year.
Another concern for retirees is the taxation of Social Security benefits. The taxable percentage of benefits is determined by a metric called combined income, which is half of the beneficiary’s Social Security benefits, plus their adjusted gross income and any non-taxable interest income. As benefits increase, so does combined income, potentially leading to more benefits being taxed.
The forecast for the 2025 COLA suggests it will be lower than the 3.20% increase seen in 2024. While this may be disappointing, it could actually be beneficial for retirees as it would mean less inflation, which would help maintain the purchasing power of their Social Security checks. It is important to note, however, that the final COLA will not be determined until the end of the third quarter.
In addition to the COLA, retirees should also be mindful of the taxation of their Social Security benefits, as a higher COLA can lead to a higher combined income and potentially increased taxation. By understanding the rules around Social Security taxation, retirees can make informed decisions about their overall wealth management.
