social security Social Security has become an increasingly important part of many seniors’ retirement budgets. In Gallup’s annual poll, 60% say Social Security is their primary source of income, the highest level in more than a decade. An additional 28% say Social Security is at least an insignificant source of retirement income.
Many seniors rely on social security to cover their living expenses, so Cost of Living Adjustments (COLA) is very important to them. Each year, recipients get an increase in their monthly check based on their year-over-year average. inflation July, August, September. We’re about a month away from getting the first data set to calculate retiree COLAs, but analysts are already offering their best guesses about where it will land.
Following June Consumer Price Index The Senior Citizens League updated its forecast following the release of the Consumer Price Index (CPI). Although last month’s inflation rate came in below expectations, the group is raising its COLA forecast to 2.63% from 2.57% last month.
Older people may be disappointed by forecasts that are far below expectations. The COLA received this year is 3.2%.This is especially true now that Social Security has become a significant part of your budget and inflation is eating away at your purchasing power. But the Senior Citizens League’s projections are actually great news for retirees.
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The biggest problem facing seniors who rely on social security
Annual cost-of-living adjustments can be a double-edged sword for retirees: Because COLAs are inflation-based, they only increase significantly if inflation increases substantially. And high inflation rates are extremely detrimental to seniors’ retirement budgets.
The average retiree who began receiving benefits in 2000 has seen the cost of living rise much faster than their Social Security benefits. The Senior Citizens League estimates that the purchasing power of benefits has fallen by 36% in real terms. High inflation rates in 2021 and 2022 have increased the cost of living, but they have also led to a larger decline in the amount of money seniors can afford with just their Social Security benefits.
But inflation isn’t all bad for seniors. In fact, healthy economies experience slow, steady increases in inflation. Money SupplyThe result is moderate inflation. Federal ReserveCentral banks, which indirectly control the money supply, currently aim to lower inflation to 2% while maintaining full employment.
Looking at the recent history of Social Security COLAs and their impact on retiree purchasing power, lower COLAs generally favor seniors. Since 2010, Social Security purchasing power has increased in most cases when the COLA was less than 3%. In years during that period when the COLA was less than 2%, purchasing power has increased by a cumulative 13%.
So the projection of a COLA of just 2.63% is good news for retirees.
Many retirees will not be able to keep their full COLA amount.
Another problem with adjusting for the rising cost of living is that it doesn’t take into account tax on Social Security benefits: Higher Social Security benefits often mean higher tax bills.
The way the government taxes Social Security is based on a measure called gross income. Gross income is half your Social Security income, plus one-half your gross income. Adjusted Gross Incomeplus any tax-free interest income. So, all else being equal, an increase in your Social Security income can increase your total income, resulting in more of your benefit being taxable.
It tells you how much of your Social Security income may be taxable based on your total income and filing status.
|
Percentage of benefits that are taxable |
Combined income (single filer) |
Joint Income (Joint Filers) |
|---|---|---|
|
0% |
Under $25,000 |
Under $32,000 |
|
Up to 50% |
$25,000 to $34,000 |
$32,000 to $44,000 |
|
Up to 85% |
Over $34,000 |
Over $44,000 |
Data source: Social Security Administration.
If these standards seem low, it’s because they haven’t been updated in over 30 years. There’s no inflation adjustment built into the system, so each year more and more retirees have a growing share of their benefits taxed by the federal government as their gross income increases due to COLAs. But in many states, Social Security Income Exemption From taxation.
A lower COLA means seniors can receive more benefits.
How big will the COLA be in 2025?
The recent CPI numbers for May and June are better than expected. If inflation remains flat through the third quarter, the COLA would be just 2.3%. What’s more likely is that inflation will be 0.1% to 0.2% per month, resulting in a COLA of 2.5% to 2.7%, which is in line with the Senior Citizens League’s forecast.
Inflation would need to rise by nearly half a percentage point on a monthly average over the next three months to match the 3.2% COLA announced last October, something that seems highly unlikely barring a major disruption.
We’re halfway through July, and the outlook for COLAs for 2025 is starting to become much clearer. The number will be finalized within the next few months, and it’s very likely to be below 3%. While this may be less than in years past, retirees should be happy with the COLA reduction and the shrinking inflation. This means the purchasing power of Social Security benefits next year is likely to increase.
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