Next year’s Social Security cost-of-living adjustment (COLA) will likely be lower than the increase seniors enjoyed in 2024, according to new estimates, as inflation continues to abate.
The Senior Citizens League, a nonpartisan group, predicts Social Security benefits will increase by 2.4% for 2025, based on current inflation numbers. The new estimate is on par with the current projection from the Congressional Budget Office (CBO) of a 2.5% bump for 2025. The increase in 2024 was 3.2%.
“The CBO uses a different methodology than TSCL, but clearly, inflation rates are expected to fall from 2023 levels, and the COLA for 2025 will also be lower,” Mary Johnson, Social Security and Medicare policy analyst at The Senior Citizens League, told Yahoo Finance.
Inflation pressures remained persistent in February, according to the latest data from the Bureau of Labor Statistics. The Consumer Price Index (CPI), a broad measure of the price of everyday goods, including groceries, gasoline, and rent, showed prices rose 0.4% over the previous month and 3.2% over last February, more than forecast and an acceleration from January’s 0.3% monthly increase and 3.1% annual gain.
But economists still broadly expect inflation to slow through 2024, and that will be reflected in the final determination of next year’s COLA adjustment from the Social Security Administration, the federal government agency that oversees the benefits.
Read more: How to find out your 2024 Social Security COLA increase
A smaller COLA would further strain the more than 70 million retired senior citizens and disabled workers who struggle with rising prices, a persistent problem with how COLAs are calculated.
“Shelter, medical, and transportation prices remain higher than the overall inflation rate,” Johnson said, pointing to categories that specifically eat up a chunk of seniors’ budgets.
“It is an ongoing struggle for seniors and retired people trying to keep up with these costs,” Johnson added. “It’s like being stuck in the mud. They’re spinning their wheels. Every time someone thinks they have all their bills settled, and they get a small raise with a new COLA, there’s always some new healthcare disaster right around the corner, or their rent increases by more than the amount of the COLA.”
‘Still early’
The COLA is calculated by averaging together inflation data for the third quarter of the year — July, August, and September of 2023 — and then comparing that figure with the same data last year. The Social Security Administration is expected to announce the 2025 COLA in mid-October after the release of the September CPI data.
Until then, this is still crystal-ball gazer time. “It’s too soon to predict the COLA. We still need seven more months of data,” Marc Goldwein, senior vice president and senior policy director at the nonprofit Committee for a Responsible Federal Budget, told Yahoo Finance. “But from what we know so far, it’s likely to be in the 2% to 3% range. It could be higher if the high inflation of the last couple of months persists.”
Read more: Inflation update on everyday expenses: Travel costs tick down, over-the-counter meds shoot up
COLA falls short of seniors’ costs
This year’s bump didn’t make up for higher costs last year for many seniors, especially in housing, health care, and car insurance, which continue to be above the overall inflation rate. It added more than $50 to the average monthly benefit of $1,848 starting in January, according to the SSA.
A 2.4% adjustment would add roughly $46 to seniors’ average monthly income of $1,909 in 2024.
Meanwhile, household expenses increased by more than $59 per month for 2023 for the vast majority of seniors, according to results from The Senior Citizens League’s 2024 Senior Survey. More than 4 in 10 reported that their household expenses rose more than $185 per month in 2023.
Part of the problem is the index used to calculate COLA doesn’t necessarily reflect typical retirees’ spending. For example the formula assumes that consumers spend only 7% of their incomes on healthcare costs, Johnson said.
“Our Senior Survey found that two-thirds of survey participants spend up to 29% of their incomes on health care costs,” she said.
Implications for beneficiaries this tax season
Because Social Security recipients received a high COLA of 8.7% in 2023, more beneficiaries are likely to be liable for federal income taxes on their Social Security benefits for the first time this tax season.
About 40% of people who get Social Security must pay federal income taxes on their benefits, according to the Social Security Administration. If you file a federal tax return as an “individual” and your combined income from all sources, including your Social Security benefit, is between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits. If your income exceeds $34,000, up to 85% of your benefits may be taxable.
For joint filers, if you and your spouse have a combined income between $32,000 and $44,000, you may have to pay income tax on up to 50% of your benefits; if it’s more than $44,000, up to 85% of your benefits may be taxable.
Worries about the future of Social Security benefits
Another concern: Social Security’s reserves are projected to run out in 2033, at which point the program will be able to pay out just 77% of benefits to seniors. That has repercussions for many workers who plan to rely on Social Security for a major portion of their retirement income.
“It’s really important for people to stay informed about what’s on the horizon for Social Security,” Johnson said. “Some of those changes can affect our pocketbooks in the very near future. So it’s a good time to get up to speed on what those changes are and how it could affect you.”
Kerry Hannon is a Senior Columnist at Yahoo Finance. She is a career and retirement strategist, and the author of 14 books, including “In Control at 50+: How to Succeed in The New World of Work” and “Never Too Old To Get Rich.” Follow her on X @kerryhannon.
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