Social Security beneficiaries have enjoyed substantial cost-of-living adjustments (COLAs), largely driven by record-high inflation. However, estimates suggest that the increase for 2025 might be more modest.
Mary Johnson, an independent Social Security and Medicare analyst, projects that beneficiaries could see a 2.5% COLA next year. This marks a potential decrease from the 3.2% increase observed in 2024 and significantly lower than the 8.7% boost in 2023, which was the highest in four decades. The 2022 adjustment was 5.9%, reflecting a similar trend of high annual increases.
In 2021, the adjustment was a mere 1.3%. Johnson notes that a 2.5% increase would be close to the average adjustment over recent years. However, this estimate remains tentative. The Social Security Administration (SSA) is expected to announce the official COLA in October, incorporating September's inflation data. The current projection has about a 17% chance of rising and a 13% chance of falling, according to Johnson.
The annual COLA is determined using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which tracks inflationary changes. Beneficiaries should also be mindful of two additional factors that impact their net benefits: taxes on Social Security income and Medicare Part B premiums.
Taxation of Benefits and Political Proposals
Up to 85% of Social Security benefits can be subject to federal income taxes, depending on an individual's combined income. For those filing as individuals with a combined income between $25,000 and $34,000 or married couples with combined income between $32,000 and $44,000, up to 50% of benefits may be taxed. For incomes exceeding these thresholds, up to 85% of benefits may be taxable.
Former President Donald Trump has proposed eliminating taxes on Social Security benefits as part of his campaign. While Trump argues that removing these taxes would aid seniors on fixed incomes, the Committee for a Responsible Federal Budget estimates this policy could increase deficits by $1.6 trillion to $1.8 trillion by 2035. Alicia Munnell, director at the Center for Retirement Research at Boston College, criticizes the proposal as detrimental, though she suggests potential reforms, such as indexing income thresholds for inflation.
Rising Medicare Part B Premiums
Another concern for retirees is the increasing cost of Medicare Part B premiums, which are deducted from Social Security checks. On average, Medicare Part B premiums rise by 5.5% annually, whereas Social Security COLAs average 2.6% per year. Over the past two decades, Medicare premiums and deductibles have surged by 109.9 percentage points, outpacing the 52.5 percentage point increase in Social Security COLAs.
Johnson explains that Medicare costs are not included in the COLA calculations, contributing to this disparity. As a result, the rising cost of Medicare premiums continues to consume a larger portion of Social Security benefits.
As beneficiaries and policymakers await the official announcement of the 2025 COLA, the interplay of inflation, taxes, and rising Medicare costs will remain a critical concern for millions of Americans relying on Social Security benefits.
