10/10/2024
Social Security COLA Set at 2.5% for 2025
With inflation slowing, annual benefit adjustment will be lowest in 4 years
By Andy Markowitz, AARP
Published October 10, 2024
Social Security beneficiaries will get a 2.5 percent increase in their monthly payments next year, the Social Security Administration (SSA) announced today.
The 2025 cost-of-living adjustment (COLA) is the lowest since 2021, reflecting a continued cooling of inflation following a surge in consumer prices during the COVID-19 pandemic.
The 2.5 percent COLA will bump up the estimated average Social Security retirement benefit by $49 a month, from approximately $1,927 to $1,976, starting in January, according to the SSA. The estimated average survivor benefit will rise from $1,788 to $1,832 and Social Security Disability Insurance (SSDI) from $1,542 to $1,580.
āInflation is clearly top of mind, not just for retirees, but for Americans generally, and the annual COLA provided by Social Security is a critical feature of the system,ā says Rob Williams, managing director of financial planning at Charles Schwab.
āSome may feel the increase for 2025 is low relative to the inflation they feel in their pocketbooks,ā Williams says. āStill, itās a welcome increase that builds on a 5.9 percent increase in payments in 2022, 8.7 percent in 2023 and 3.2 percent this year.ā
The COLA is determined by year-to-year changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which trackļ»æs price trends for a market basket of goods and services. The CPI-W is a subset of the overall Consumer Price Index, the federal governmentās main gauge of inflation.
The 2025 adjustment represents the difference between the average CPI-W for July, August and September of 2024 and the average for those months in 2023. The U.S. Bureau of Labor Statistics reported Oct. 10 that the index rose at a 2.2 percent rate in September, following increases of 2.4 percent in August and 2.9 percent in July.ļ»æ
Because one yearās COLA reflects the prior yearās price trends, there can be a lag in how it affects retireesā pocketbooks. For example, 2022ās 5.9 percent increase was outpaced by that yearās inflation, which reached 9 percent. That produced an 8.7 percent COLA for 2023, a year when inflation ebbed to 3.4 percent by December.
The 2025 COLA could still buttress beneficiariesā buying power if the inflation rate continues to drop. However, the Federal Reserveās Survey of Professional Forecasters is projecting that the main Consumer Price Index will hold steady at 2.4 percent through the first half of 2025.
āThis adjustment means older Americans will receive needed relief to help better afford essential items from groceries to gas,ā Jo Ann Jenkins, AARPās chief executive officer, said in a statement. But even with the COLA, she added, āwe know many older Americans who rely on Social Security may find it hard to pay their bills. Social Security is the primary source of income for 40 percent of older Americans.ā
COLA gains can also be offset in part by increases in premiums for Medicare Part B, which covers outpatient services such as doctor visits. For most Part B participants, premiums are deducted directly from their Social Security payments.
In their 2024 annual report, Medicareās trustees projected that the standard Part B premium paid by most Medicare beneficiaries ā $174.80 a month this year ā will rise to $185 a month in 2025. That would effectively reduce the Social Security COLA by $10.20 a month for most recipients.
The Centers for Medicare & Medicaid Services typically announce Part B premium prices in mid-October.ļ»æ
āIt may not feel like the cost of living is only at a 2.5 percent inflation rate, but that is where we are now,ā says Lisa Featherngill, national director of wealth planning for Comerica Wealth Management.
āItās also important to think about the fact that Social Security has built in increases from the last three years,ā she adds. āWeāre building on the compounding of those rates over time. It is factoring in where weāve been, and the fact that some prices just havenāt gone down.ā
Funding shortfall on the horizon?
Social Security is almost entirely funded by a payroll tax of 12.4 percent on eligible wages, with employers and employees each paying 6.2 percent. (Self-employed people pay the full 12.4 percent.) The tax is applied to earnings up to a certain threshold, which will increase next year from $168,600 to $176,100.
