Hey retirees, are you expecting a 2.5% increase in Social Security by 2025? Think again…

For most retirees, Social Security provides more than just a monthly check. Rather, it establishes a financial foundation that retirees would struggle to live without.

Based on an analysis by the Center for Budget and Policy Priorities (CBPP), the poverty rate for adults aged 65 and over is 10.2% with Social Security, as of 2022. If this vital program does not existed, the CBPP loves poverty. the rate for adults 65 and older would be a staggering 38.7%!

More than two decades of annual Gallup polls reiterate the importance of Social Security income for workers who can no longer make ends meet. Between 80% and 90% of retirees surveyed rely on their monthly paycheck in some way to cover their expenses, including 88% in the April 2024 survey.

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With Social Security playing such an important role in helping retirees pay their bills, it should come as no surprise that the 2025 cost-of-living adjustment (COLA) revealed on October 10 was a outstanding event of the year.

But even though the COLA title for 2025 was higher than average, retirees shouldn’t expect to make up the entirety of their next raise.

The increase in Social Security in 2025 will be higher than average for the fourth consecutive year

The “COLA” that Social Security passes on to beneficiaries most years is the program’s mechanism to combat the loss of purchasing power due to inflation. In other words, if the price of goods and services increases collectively, it would be ideal for Social Security benefits to increase by the same percentage to ensure that seniors do not lose purchasing power.

During the 2010s, Social Security increases were minuscule. Only two of the 10 years exceeded 2% during the decade, with deflation causing no COLA to be passed in 2010, 2011 and 2016.

But over the past four years, the portfolios of Social Security beneficiaries have grown significantly. In the years 2022, 2023 and 2024, beneficiaries received respective increases of 5.9%, 8.7% and 3.2%. Notably, the 8.7% increase in 2023 was the largest percentage increase in 41 years and the largest from a nominal dollar perspective since the program began.

In 2025, beneficiaries will receive a 2.5% increase, slightly above the average COLA of 2.3% over the previous 15 years.

While this represents the lowest percentage COLA since the 1.3% increase in 2021, it will still be welcome after several years of above-average inflation. The average retired worker is expected to see their monthly check increase by $49 to $1,976. Meanwhile, disabled workers and survivor beneficiaries should see their respective average monthly payments increase by $38 to $1,580 and $1,551.

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Retirees are unlikely to feel the full effect of their 2.5% increase in Social Security by 2025

But as the old saying goes, “Don’t count your chickens before they hatch.” Although retirees, on paper, will receive a COLA of 2.5% next year, there is a extremely high probability that a significant part of this goodbye will be kissed.

For starters, the Report of the Medicare Administrators, which was released in May, estimates that the Part B premium in 2025 will increase by 5.9% to $185 per month. Part B is the segment of Medicare that handles outpatient services.

For Social Security beneficiaries who are also enrolled in traditional Medicare (Medicare eligibility age is 65), the Part B premium is usually deducted from your monthly Social Security payment. Although Social Security’s COLA is increasing benefits by 2.5% year-over-year, the Report of the Medicare Administrators expects monthly Part B premiums to rise a little more than $10 a month by 2025. In other In other words, most retired workers will see some, or potentially all, of their 2025 COLA offset by a sizable Medicare Part B premium increase.

But this is only part of the challenge that awaits retirees in 2025.

In addition to most age beneficiaries losing some or all of their increase to a higher Part B premium, steadily growing COLAs continue to expose a larger percentage of retirees to income taxation Social Security over time.

In 1983, with Social Security’s asset reserves on the brink of exhaustion, Congress passed the Social Security Amendments of 1983, and then-President Ronald Reagan signed them into law. This latest bipartisan overhaul of America’s main retirement program gradually raised the full retirement age and payroll taxes on workers, and introduced the now-hated benefits tax.

Beginning in 1984, up to 50% of Social Security earnings were federally taxed if provisional income (adjusted gross income plus tax-free interest plus 50% of Social Security benefits) exceeded $25,000 for a single filer and the $32,000 for a single donor. couple presenting together. In 1993, the Clinton administration added a second tax bracket that exposed up to 85% of Social Security earnings to federal taxes if provisional earnings exceeded $34,000 and $44,000 for applicants and couples who presented jointly, respectively.

The problem is that these interim income thresholds have not even been adjusted for inflation since they were introduced decades ago. With each passing glue to increase benefits, a greater number of retirees are exposed to the taxation of benefits.

Whether it’s Medicare Part B or federal benefit taxation, most retirees won’t feel the full effect of their 2.5% COLA in 2025.