The 2025 Social Security Cost-of-Living Adjustment (COLA) Might Not Increase Your Monthly Benefits as Much as You Think


These factors could completely negate any raise you’ll receive from Social Security.

Seniors collecting Social Security receive a raise almost every year to help their checks keep up with the rising cost of living. The government is still a few weeks away from finalizing the numbers to calculate next year’s cost-of-living adjustment, or COLA. If everything goes as expected, Social Security recipients should receive a 2.5% bump to their benefits starting in January.

That number may be disappointing after 2023’s 8.7% COLA and this year’s 3.2% adjustment. On top of that, many seniors might not even see a 2.5% increase to their monthly checks. Here’s why.

A Social Security card and a check from the United States Treasury sandwiched between $100 bills.

Image source: Getty Images.

The cost of Medicare is climbing faster than inflation

The Social Security Administration (SSA) automatically deducts Medicare Part B premiums from beneficiaries’ checks if they’re enrolled in the government-sponsored health insurance program. You become eligible for Medicare at 65, and the SSA will automatically enroll you in Part A and Part B if you’ve already been collecting retirement or disability benefits.

The cost of Medicare premiums goes up every year to cover the costs of providing healthcare to America’s seniors. The Medicare Board of Trustees estimated an increase in the monthly Part B premium for most households from $174.70 to $185.00. That’s a 5.9% increase in costs, much more than the 2.5% estimated COLA.

To put it another way, the average Social Security beneficiary currently receives $1,872 in monthly retirement benefits. A 2.5% increase to that average is $46.80 per month, but approximately $10.30 of that will go toward paying higher Medicare premiums. As a result, the average beneficiary will only receive a boost of about 2.2% to their current checks.

Don’t forget about taxes

The Social Security Administration will only withhold taxes from your monthly checks if you ask it to, and then only in preset percentages ranging from 7% to 22%. But whether the SSA withholds taxes from your monthly check or not, next year’s COLA is likely to come with an extra tax burden for many retirees.

The way the federal government taxes Social Security is based on a metric called combined income, which is equal to half your Social Security benefits, plus your adjusted gross income and any untaxed interest income. If your combined income exceeds certain thresholds, a portion of your Social Security benefits count as taxable income that’s subject to federal income tax.

Here are the thresholds:

Taxable Portion of Benefits Combined Income, Individual Combined Income, Married
Filing Jointly
0% Less than $25,000 Less than $32,000
Up to 50% $25,000 to $34,000 $32,000 to $44,000
Up to 85% Over $34,000 Over $44,000

Data source: Social Security Administration.

As you can see, those thresholds are extremely low. What’s more, the SSA doesn’t adjust them for inflation. As such, more and more seniors see more and more of their benefits become taxable every year.

When you consider the impact of the COLA on your net income, consider the marginal tax rate on your COLA. If 85% of your COLA is taxable at the 12% or 22% tax bracket, that’s a 10% or 19% respective decrease in the actual value of the COLA for your budget. What’s more, you may be subject to state income tax on your Social Security benefits if you live in one of nine states.

Securing your Social Security COLA

Understanding how the above factors impact your monthly Social Security benefit is half the battle to ensuring you get as much from the COLA as possible. While there’s not much you can do to stave off the rising cost of medical insurance and healthcare, the Social Security program does have some protections built into it.

The hold-harmless provision ensures your Medicare premium won’t increase more than your Social Security benefit. That said, it could eat the entire amount of your benefit increase.

When it comes to taxes, understanding the factors that go into your combined income is step one. Combatting Social Security taxation effectively requires advanced planning and paying taxes upfront in order to avoid higher taxes later. The most commonly used tool is the Roth conversion, which allows you to pay taxes now to make tax-free withdrawals in the future. You may also be able to strategically take capital losses to offset capital gains to keep your adjusted gross income low while living off your investments.

For many seniors, however, the reality is that next year’s COLA won’t produce the expected increase in spending power as the headline number might suggest.



Source link

About The Author

Scroll to Top