Rosalind Evans
The upcoming cost-of-living adjustment (COLA) for Social Security benefits in 2025 is estimated to be lower than previous years, with a projected increase of 2.5%. This adjustment follows a trend of higher increases due to inflation but reflects recent changes in economic conditions. Here’s what you need to know about the expected COLA, its implications, and additional factors that may impact retirees’ benefits.
Why Is the 2025 COLA Lower?
In recent years, Social Security recipients have enjoyed significant cost-of-living adjustments, such as the 3.2% increase in 2024 and a historic 8.7% in 2023. According to Social Security and Medicare analyst Mary Johnson, the 2.5% estimate for 2025 reflects a shift toward more moderate inflation. As Johnson explains, “If a 2.5% COLA goes into effect in 2025, it would be about average.”
The final COLA for 2025 will be announced in October after new inflation data is released. This estimate could change, with Johnson noting, “There’s a 17% chance of an increase and a 13% chance of a decrease.”
How Is the COLA Calculated?
The annual adjustment to Social Security benefits is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). This calculation uses inflation data from the third quarter, but it doesn’t consider certain expenses that heavily impact retirees, such as rising Medicare premiums.
Medicare Part B premiums covering outpatient services often rise faster than Social Security adjustments. Johnson highlights, “Medicare Part B premiums go up by 5.5% per year on average, while Social Security cost-of-living adjustments average 2.6%.”
The Impact of Taxes on Benefits
Taxes on Social Security benefits can significantly reduce the net amount retirees receive. Up to 85% of benefits may be taxed, depending on combined income. Former President Donald Trump recently reignited his call to eliminate taxes on Social Security as part of his platform to “help seniors on fixed incomes.”
However, experts warn of the financial impact this could have. Alicia Munnell, director at the Center for Retirement Research at Boston College, calls Trump’s plan a “supremely unhelpful idea,” as it would increase deficits and affect the Social Security trust fund. “Taxes help cover the program’s spending and make it more progressive,” Munnell said.
Medicare Premiums Continue to Rise
While Social Security adjustments fluctuate with inflation, Medicare Part B premiums have consistently risen, taking a larger share of retirees’ benefits. Between 2005 and 2024, Part B premiums increased by over 109%, while COLA only rose by 52%. This growing disparity concerns beneficiaries, as Medicare costs aren’t factored into the annual COLA calculations.
Johnson explains, “The dramatic difference is partly due to Medicare costs not being included in the annual Social Security COLA calculations.”
What Retirees Can Expect
The potential 2.5% increase in 2025 marks a return to more typical COLA adjustments. However, retirees must be mindful of taxes and rising healthcare costs, which can erode their benefits. As the Social Security Administration prepares to announce the final COLA in October, beneficiaries should stay informed to maximize their retirement income.
Stay tuned for further updates on managing your Social Security and Medicare benefits.
