Social Security beneficiaries have been receiving higher cost-of-living adjustments in recent years due to record high inflation. However, the projected increase for 2025 may not be as generous as in previous years. Mary Johnson, an independent Social Security and Medicare analyst, estimates that beneficiaries may see a 2.5% increase to their benefits next year. This is a decrease from the 3.2% adjustment seen in 2024, marking a potential trend of smaller increases in the coming years.
In 2023, there was an 8.7% increase in benefits, the highest in four decades, driven by a spike in inflation. This was followed by a 5.9% raise in 2022, which was also considered a recent high. In contrast, the cost-of-living adjustment was only 1.3% in 2021, reflecting the varying impact of inflation on Social Security benefits over the years.
If the projected 2.5% increase goes into effect in 2025, it would be considered average by Johnson’s standards. However, it’s important to note that this estimate is subject to change pending the official announcement from the Social Security Administration in October. The actual increase will be based on new government inflation data for September, with a 17% chance of increasing and a 13% chance of decreasing, according to Johnson.
Factors Affecting Social Security Benefits
The annual Social Security cost-of-living adjustment is calculated using third-quarter data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Two factors that can impact the net amount retirees receive from Social Security during times of high inflation are taxes on benefits and Medicare Part B premiums.
Currently, up to 85% of Social Security benefits may be subject to federal income taxes based on combined income, which includes half of the Social Security benefits, total adjusted gross income, and nontaxable interest. The thresholds for these taxes have remained unchanged over time, leading to more beneficiaries paying taxes on their benefits.
Former President Donald Trump has proposed eliminating taxes on Social Security benefits as a way to help seniors on fixed incomes. However, this plan could have significant consequences for both the Social Security and Medicare Hospital Insurance trust funds, potentially increasing deficits by trillions of dollars through 2035, according to the Committee for a Responsible Federal Budget.
Medicare Part B Premiums and Social Security Benefits
Many retirees have their monthly Medicare Part B premiums deducted directly from their Social Security benefit checks. While these premiums increase by an average of 5.5% per year, Social Security cost-of-living adjustments only average 2.6% annually, according to analysis by Johnson. As a result, premium costs are consuming a larger portion of Social Security benefits over time.
From 2005 to 2024, Medicare Part B premiums and deductibles grew at double the rate of Social Security’s cost-of-living adjustments. This disparity is partly due to the fact that Medicare costs are not factored into the annual Social Security COLA calculations, creating a financial burden for retirees relying on these benefits.
It’s crucial for policymakers to address the growing misalignment between Medicare Part B premiums and Social Security cost-of-living adjustments to ensure that retirees can afford essential healthcare services without compromising their financial security. By indexing income thresholds for taxes on benefits and adjusting the share of benefits included in adjustable gross income, a more equitable system could be established to support retirees in the long term.