The Bureau of Labor Statistics (BLS) has released the second of three data points that will determine how much retirees will receive in pensions going forward. social security next year's retirement benefits.
The annual Social Security Cost of Living AdjustmentThe COLA, or cash allowance, is a key feature of the program. Many retirees rely on the annual benefit increase to keep up with rising living costs and make ends meet. Last year, Social Security increased benefits by 3.2%.
Seniors may be disappointed to hear that this year's COLA will be a bit lower than last year. The Social Security Administration provides the following year-over-year change in average COLAs: inflation A reading will be needed on the third quarter to determine the adjustment for next year. In the first two months of the quarter, the average inflation rate rose by just 2.6%. But the September year-over-year increase is likely to be below that figure, leading to an even lower COLA for 2025.
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2025 Social Security COLA Details
As mentioned above, the annual COLA is determined by measuring the average increase in the third quarter inflation rate. Specifically, the Social Security Administration uses an index called the CPI-W, which measures the increase in the cost of living for urban wage earners and clerical employees.
The formula is simple: take the average of the CPI-W for July, August, and September and divide it by the average CPI-W for the same months of the previous year. Values are usually released in the middle of the second week of each month. The BLS just released the data for August, but here's where we stand now:
|
year |
July |
August |
September |
average |
|---|---|---|---|---|
|
2023 |
299.899 |
301.551 |
302.257 |
301.236 |
|
2024 |
308.501 |
308.640 |
N/A |
N/A |
Data source: Social Security Administration and Bureau of Labor Statistics.
As mentioned above, the average year-over-year increase in the CPI-W for the first two months of the quarter was 2.6%. However, September's reading showed a large monthly increase of 0.2%, which makes it likely that September's reading will be lower year-over-year. Even with similar monthly increases as last year, the quarterly average for the COLA would be just 2.5%.
As of now, it's very likely that next year's COLA for retirees will be 2.5 percent. The Senior Citizens League has also updated its projection with the same figure, though we won't know for sure until October 10, when the BLS releases the September CPI-W. Any number between 308.662 and 309.610 rounds up or down to a COLA of 2.5 percent.
The 2025 COLA will make many retirees worse off.
If the numbers turn out as expected, a 2.5% COLA would mean the average retiree's monthly benefit would increase by $48, based on the average retiree benefit of $1,920 paid by the Social Security Administration last month.
Importantly, for Social Security recipients, the full amount of that $48 increase is unlikely to show up in their monthly checks, because the Social Security Administration may withhold some of the benefit to pay taxes and Medicare Part B premiums.
Many seniors face the reality that an increasing amount of their Social Security benefits are subject to income tax each year. This is because the income thresholds that determine what percentage of your benefits are taxable have not been adjusted for inflation in over 30 years. As a result, taxes can cut into the increase in your monthly benefits.
moreover, Medicare The premium increases may come as a surprise to many. The Medicare Board of Regents estimates that Part B premiums could rise by $10.30 in 2025 to $185 per month, eating up more than 20 percent of the increase in average monthly benefits. Medicare premiums for 2025 won't be released until mid-October.
The rising cost of Medicare is a big challenge for retirees. Many are seeing their actual cost of living rise faster than their Social Security COLA. Healthcare costs are a big part of seniors' budgets and are rising faster than the average inflation rate. Housing costs are another big budget item for many, and the inflation rate for housing costs is also rising faster than the overall average. As a result, many retirees are forced to tighten their budgets as their Social Security benefits cannot keep up with spending on necessities.
The good news for seniors is that the economy is showing signs of returning to slow and stable inflation. Historically, low and stable inflation has led to increased purchasing power for Social Security benefits. Unfortunately, it looks like retirees will have to wait until at least 2026 to see any relief.
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