Retired-worker beneficiaries shouldn’t count their chickens before they’re hatched.
For most retirees, Social Security doesn’t just provide a monthly check. Rather, it lays a financial foundation that retirees would struggle to live without.
Based on an analysis from the Center on Budget and Policy Priorities (CBPP), the poverty rate for adults aged 65 and older is 10.2% with Social Security, as of 2022. If this vital program didn’t exist, the CBPP estimates the poverty rate for adults aged 65 and above would be a jaw-dropping 38.7%!
More than two decades of annual surveys from Gallup reiterate the importance of Social Security income for workers who can no longer provide for themselves. Between 80% and 90% of polled retirees rely on their monthly check, in some capacity, 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) reveal on Oct. 10 was a highlight event of the year.
But while the headline COLA for 2025 came in above average, retirees shouldn’t count on netting the entirety of their upcoming raise.
Social Security’s 2025 raise will be above average for the fourth consecutive year
The “COLA” that Social Security passes along to beneficiaries most years is the program’s mechanism for fighting back against a loss of purchasing power due to inflation. In other words, if the price for goods and services rises collectively, Social Security benefits should, ideally, increase by the same percentage to ensure that seniors don’t lose buying power.
During the 2010s, Social Security raises were minuscule. Only two of the 10 years surpassed 2% during the decade, with deflation leading to no COLA being passed along in 2010, 2011, and 2016.
But over the last four years, the wallets of Social Security recipients have grown meaningfully. In 2022, 2023, and 2024, beneficiaries received respective raises of 5.9%, 8.7%, and 3.2%. In particular, the 8.7% boost in 2023 was the largest on a percentage basis in 41 years, and the biggest from a nominal-dollar perspective since the program’s inception.
In 2025, beneficiaries will be receiving a 2.5% raise, which is slightly above the 2.3% average COLA over the prior 15 years.
Though this represents the lowest COLA on a percentage basis since the 1.3% raise in 2021, it’ll still be welcome following multiple years of above-average inflation. The average retired worker is expected to see their monthly check climb by $49 to $1,976. Meanwhile, workers with disabilities and survivor beneficiaries should see their respective average monthly payouts each jump by $38 to $1,580 and $1,551.
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Retirees are unlikely to feel the full effect of their 2.5% Social Security raise in 2025
But as the old idiom goes, “Don’t count your chickens before they hatch.” While retirees are, on paper, set to receive a 2.5% COLA in the upcoming year, there’s an extremely high likelihood that they’ll be kissing a meaningful portion of this raise goodbye.
To begin with, the Medicare Trustees Report, which was released in May, estimates that the Part B premium in 2025 will climb by 5.9% to $185 per month. Part B is the segment of Medicare that’s responsible for outpatient services.
For Social Security beneficiaries who are also enrolled in traditional Medicare — the eligibility age for Medicare is 65 — the premium for Part B is usually deducted from their monthly Social Security payout. Even though Social Security’s COLA is increasing benefits by 2.5% on a year-over-year basis, the Medicare Trustees Report expects monthly Part B premiums to rise by a little over $10 per month in 2025. In other words, most retired workers will see some, or potentially all, of their 2025 COLA offset by a sizable uptick in Medicare’s Part B premium.
But this is just part of the challenge that awaits retirees in 2025.
In addition to most aged beneficiaries losing some or all of their raise to a higher Part B premium, steadily rising COLAs continue to expose a larger percentage of retirees to the taxation of Social Security income 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 last sweeping bipartisan overhaul of America’s leading retirement program gradually increased the full retirement age and payroll taxation on workers, and introduced the now-hated taxation of benefits.
Beginning in 1984, up to 50% of Social Security income became taxable at the federal level if provisional income — adjusted gross income plus tax-free interest plus 50% of Social Security benefits — surpassed $25,000 for a single filer and $32,000 for a couple filing jointly. In 1993, the Clinton administration added a second tax tier that exposed up to 85% of Social Security income to federal taxation if provisional income topped $34,000 and $44,000 for single filers and couples filing jointly, respectively.
The issue is that these provisional income thresholds haven’t once been adjusted for inflation since they were introduced decades ago. With each passing COLA that increases benefits, a higher number of retirees are being exposed to the taxation of benefits.
Whether it’s Medicare Part B or the federal taxation of benefits, most retirees won’t feel the full effect of their 2.5% COLA in 2025.
