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Next year’s Social Security cost-of-living adjustment (COLA) will likely be lower than the increase seniors will receive in 2024, according to new estimates, as inflation continues to slow.
The Alliance on Seniors, a nonpartisan group, projects that Social Security benefits will increase by 2.4% in 2025, based on current inflation rates. The new forecast is on par with the Congressional Budget Office’s (CBO) current forecast of a 2.5% increase in 2025. The increase rate in 2024 was 3.2%.
“CBO uses a different methodology than TSCL, but clearly inflation is expected to decline from 2023 levels, and 2025 COLAs will be even lower,” Social Security for Seniors Alliance said.・Medicare policy analyst Mary Johnson said. Yahoo Finance.
Inflationary pressures continued in February, according to the latest data from the Bureau of Labor Statistics. According to the Consumer Price Index (CPI), which broadly measures the prices of daily necessities such as food, gasoline, and rent, prices rose 0.4% from the previous month and 3.2% from February last year, exceeding expectations and accelerating from January. Monthly increase of 0.3%, annual rate of increase of 3.1%.
But economists still largely expect inflation to slow through 2024, which will be reflected in next year’s final decision on COLA adjustments by the Social Security Administration, the federal agency that oversees benefits.
read more: How to find out your Social Security COLA increase in 2024
A smaller COLA would further burden the more than 70 million retirees and disabled workers who suffer from rising prices, but this is a deep-rooted problem with how the COLA is calculated.
“Prices for shelter, health care and transportation remain higher than the overall rate of inflation,” Johnson said, pointing to categories that eat up a significant portion of seniors’ budgets in particular.
“For seniors and retirees, trying to cover these costs is an ongoing struggle,” Johnson added. “It’s like they’re stuck in the mud. They’re idling around. Every time someone thinks they’ve settled all their claims and gotten a small raise with a new COLA, they’re always turning the corner. There will be new medical emergencies everywhere, or rents will increase beyond the COLA amount.”
‘still early’
The COLA is calculated by averaging inflation data for the third quarter of 2023 (July, August, and September 2023) and comparing that number to the same data from last year. The Social Security Administration is expected to release the 2025 COLA in mid-October, following the release of September’s CPI data.
Until then, it’s still time to stare into the crystal ball. “It’s too early to predict COLA. We need seven more months of data,” Mark Goldwein, senior vice president and senior policy director at the nonprofit Committee for a Responsible Federal Budget, told Yahoo Finance. . “But based on what we know so far, that rate is likely to be in the 2% to 3% range. If the high inflation of the past few months continues, it could rise further.”
read more: Inflation updates on everyday expenses: Transportation costs fall, over-the-counter medicine prices rise
COLA is below cost for seniors
For many seniors, this year’s rise in prices did not offset last year’s rise in costs, especially for housing, health care and auto insurance, which still exceeded the overall rate of inflation. That’s an increase of more than $50 to the average monthly benefit of $1,848 from January, according to the SSA.
The 2.4% adjustment would increase average monthly income for seniors by about $46 to $1,909 in 2024.
Meanwhile, for the majority of seniors, household spending increased by more than $59 per month in 2023, according to the results of the Seniors Federation’s 2024 Senior Survey. More than 4 in 10 people reported that their household expenses increased by $185 or more per month in 2023.
Part of the problem is that the index used to calculate COLA doesn’t necessarily reflect the expenses of a typical retiree. For example, the formula assumes consumers spend just 7% of their income on health care costs, Johnson said.
“Our senior research found that two-thirds of survey participants spend up to 29% of their income on health care costs,” she said.
Impact on beneficiaries this tax season
Social Security recipients received a higher COLA of 8.7% in 2023, so more beneficiaries will likely pay federal income taxes on their Social Security benefits for the first time this tax season.
According to the Social Security Administration, about 40% of people receiving Social Security must pay federal income taxes on their benefits. For up to 50% of benefits if you file a federal tax return as an “individual” and your total income from all sources, including Social Security benefits, ranges from $25,000 to $34,000. You may have to pay income tax. If his income exceeds $34,000, up to 85% of the benefit may be taxed.
If you are a joint filer, you may have to pay income tax on up to 50% of your benefits if you and your spouse have a combined income of between $32,000 and $44,000. Up to 85% of your benefits can be taxed if they exceed $44,000.
Concerns about the future of social security benefits
Another concern is that Social Security’s reserves are projected to run out in 2033, at which point the program will only be able to pay out 77% of benefits to seniors. This affects many workers who plan to rely on Social Security for a large portion of their retirement income.
“It’s really important that people stay informed about what’s going to happen to Social Security,” Johnson said. “Some of those changes may impact our wallets in the near future. So what are these changes and how are they likely to affect us? It’s a good opportunity to figure out what’s going on.”
Kelly Hannon is a senior columnist at Yahoo Finance. She is a career and retirement strategist and the author of 14 of her books, including “The World’s Best.”Taking Control Even Over 50: How to Succeed in the New World of Work.” and “You’re never too old to get rich.” Follow her on X @Kellyhannon.
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