Hello retirees, do you expect a 2.5% increase in Social Security in 2025? Think about it again…

For most retirees, Social Security doesn't just issue a monthly check. Rather, it lays a financial foundation that pensioners could hardly live without.

Based on an analysis by the Center on Budget and Policy Priorities (CBPP), the poverty rate for adults age 65 and older with Social Security is 10.2% as of 2022. If this important program did not exist, the CBPP estimates the poverty rate for adults ages 65 and older would be a staggering 38.7%!

More than two decades of annual Gallup polls underscore the importance of Social Security income for workers who can no longer support themselves. Between 80% and 90% of retirees surveyed rely in some way on their monthly check 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 Oct. 10 announcement of the 2025 Cost of Living Adjustment (COLA) was a highlight event of the year.

But even if the headline COLA for 2025 was above average, retirees shouldn't expect to receive their entire upcoming raise.

The 2025 Social Security increase will be above average for the fourth year in a row

The “COLA,” which Social Security passes on to beneficiaries in most years, is the program’s mechanism for combating a loss of purchasing power due to inflation. In other words, as the price of goods and services rise overall, Social Security benefits should ideally increase by the same percentage to ensure that seniors do not lose purchasing power.

In the 2010s, Social Security increases were small. Only two of the ten years exceeded the 2 percent mark over the decade, with deflation resulting in no COLA being passed in 2010, 2011 and 2016.

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

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

While this is the lowest COLA in percentage terms since the 1.3% increase in 2021, it will still be welcome after several years of above-average inflation. The average retiree is expected to increase their monthly check by $49 to $1,976. Meanwhile, the respective average monthly payouts for workers with disabilities and survivors are expected to increase by $38 each to $1,580 and $1,551, respectively.

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It's unlikely retirees will feel the full impact of their 2.5% Social Security increase in 2025

But as the old saying goes, “Don't count your chickens before they hatch.” While on paper retirees are expected to receive a 2.5% COLA next year, there is one extremely There's a high chance they'll walk away from a significant portion of that raise.

First, the Medicare Trustees Report released in May estimates that the Part B premium will rise 5.9% in 2025 to $185 per month. Part B is the segment of Medicare responsible for outpatient services.

For Social Security recipients who are also enrolled in traditional Medicare—the eligibility age for Medicare is 65—the Part B premium is typically deducted from their monthly Social Security payout. Even though Social Security's COLA increases benefits by 2.5% compared to last year, the Medicare Trustees Report projects monthly Part B premiums will increase by just over $10 per month in 2025 . In other words: Most retirees will see some or possibly all of their 2025 COLA offset by a significant increase in Medicare's Part B premium.

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

In addition to most older beneficiaries losing some or all of their pay increase due to a higher Part B premium, a larger percentage of retirees continue to be exposed to taxation on Social Security income over time due to ever-increasing COLAs.

In 1983, with Social Security's asset reserves nearing depletion, Congress passed the 1983 Social Security Amendments and then-President Ronald Reagan signed them into law. This latest comprehensive, bipartisan overhaul of America's premier retirement program gradually increased the full retirement age and payroll taxes for workers and introduced the now-hated tax on benefits.

Beginning in 1984, up to 50% of Social Security income became federally taxable if provisional income—adjusted gross income plus tax-free interest plus 50% of Social Security benefits—exceeded $25,000 for a single filer and $32,000 for a couple filing jointly makes the submission. In 1993, the Clinton administration implemented a second tax bracket that subjected up to 85% of Social Security income to federal taxation when the provisional income exceeds $34,000, or $44,000 for single filers and couples filing jointly, respectively. exceeds.

The problem is that these temporary income limits have not been adjusted for inflation once since they were introduced decades ago. Each passing of the COLA that increases benefits exposes a greater number of retirees to benefit taxation.

Whether it's Medicare Part B or the federal taxation of Social Security benefits, most retirees won't feel the full impact of their 2.5% COLA in 2025.

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