People who depend on Social Security as their main source of income should be worried about the possibility of a smaller cost-of-living adjustment (COLA) in 2025. The COLA is meant to keep up with inflation every year, which helps retirees keep their spending power.
But predictions for the coming year show that the change will be smaller than expected. This could make it harder for many retirees to handle rising prices for goods and services they need.
Why is a lower COLA expected for social security in 2025?
Social Security’s cost-of-living adjustment (COLA) is based on the CPI-W for wage earners and office workers in cities during the third quarter of the previous year. This measure tracks changes in prices that affect people and is used to change how much money retirees get.
The COLA was set at 3.2% in 2024, which helped a little with the high inflation rates that came after the pandemic. The change for 2025, on the other hand, is expected to be a lot smaller.
The COLA is expected to stay around 2.6% in 2025, which would be the lowest gain since 2021. This is mostly because inflation is starting to level off after being very high for a few years. Even though a 2.6% rise is still big compared to the past, it might not be enough to make up for the rising costs of things like healthcare and housing that retirees pay more for.
How will this lower COLA impact retirees?
The yearly change in Social Security benefits is a lifesaver for retirees who want to keep their quality of life, especially since the costs of basic goods and services keep going up. Even though inflation may be going down overall, retirees often see higher prices in important areas like housing and healthcare.
The rising cost of health care is one of the biggest problems that seniors have to deal with. Schroders did a study that found that retirees spend about 14% of their monthly income on prescription drugs and other medical costs. Costs like these tend to rise faster than inflation, which means that a lower COLA might not be enough to cover these rising costs.
A big chunk of the COLA raise could also come from higher premiums for Medicare Part B, which pays for outpatient medical care. Part B rates will go up by about 5.8% in 2025, according to the Medicare Trustees Board. This will bring the monthly cost up to about $185, from $174.80 in 2024.
High-income surcharge impact (IRMAA)
The Income-Related Monthly Adjustment Amount (IRMAA), which is a Medicare surcharge for people with high salaries, could make the benefits from the COLA even less valuable for those people.
This surcharge is based on how much money seniors made two years ago. This means that their Part B premiums in 2025 will be based on their income from 2023. According to research by Kiplinger.com, this group of retirees could pay between $259 and $628.90 per month.
What other factors influence the Cost-Of-Living Adjustment?
The 2025 COLA is affected by both the general rate of inflation and certain factors that affect seniors more than other people. One major cause is the rising cost of living, which affects both people who own their own homes and people who rent them.
Rent prices may not be going up for retirees who own their own houses, but property taxes and homeowners insurance are. Both of these costs have gone up a lot in the last few years.
Besides that, the prices of utilities like energy have also gone up. After the record-breaking heatwaves last summer, when many older people had to spend more on air cooling and other climate-related utilities, this is especially important.
COLA projections compared to previous years
The expected 2.6% COLA for 2025 is less than the rises seen in the last two years, but it is still higher than the average before the pandemic. But some experts, like Mary Johnson, an analyst for Social Security and Medicare, say that the COLA still doesn’t show how much seniors really pay for things like health care and insurance.
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