Harv's Corner

’25 Social Security COLA to be 2.5%
Moderating inflation tempers monthly payment increase.
By DANIELLE KAYE The New York Times

OK Great!  2.5% I think I'll buy a new car.  No, that wouldn't be fiscally responsible. I wouldn't want to use it all at once.  
HarvI

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Tens of millions of Americans receiving Social Security benefits are poised to see a 2.5% increase in their monthly checks next year to keep pace with inflation, the Social Security Administration said Thursday, an uptick that’s on a par with average annual increases in recent decades.

The average monthly benefit for retired workers is set to increase by $49 to $1,976 starting in January, up from the current average of $1,927. While retirees and their dependents account for a majority of the more than 72 million Social Security beneficiaries, millions of others will also see their checks go up, including disabled workers, survivors of deceased workers and people with low incomes, as part of the Supplemental Security Income program.

“This adjustment means older Americans will receive needed relief to help better afford essential items from groceries to gas,” Jo Ann Jenkins, chief executive of AARP, said in a statement.
The cost-of-living adjustment is in line with the 2.6% average annual increase over the past 20 years, but it’s modestly lower than the 3.2% rise beneficiaries received this year.

And it’s significantly less than the 8.7% uptick for 2023, when pandemic-related disruptions and supply shortages drove up inflation sharply. At that time, the Federal Reserve raised its benchmark interest rate to its highest level in decades and has only recently started to cut it as inflation has cooled.

The 2025 Social Security adjustment, known as the COLA, reflects the slowdown in inflation.

“The COLA is meant to replace what people lost in buying power because of price increases,” said Teresa Ghilarducci, an economist at the New School who specializes in retirement security. “So we want that COLA to go down.”

Social Security calculates the adjustment using the Consumer Price Index for Urban Wage Earners and Clerical Workers, taking the average inflation readings from July, August and September of the current year and comparing them with the same period from a year earlier.

But the index tracks a range of goods and services that are purchased primarily by younger working people, not by retirees, who often spend more of their income on housing and health care. The costs experienced by Americans over age 62 tend to outpace the index, Ghilarducci said, making the annual adjustment fall short of what retirees actually need.

The adjustment is often mostly eaten up by the increase in Medicare Part B premiums, which are automatically deducted from Social Security checks. Some experts, including Ghilarducci, say Social Security beneficiaries also need an increase in their baseline benefits to maintain their buying power.

Social Security is largely funded through payroll taxes, which are split between employers and employees. This year, they each paid 6.2% of wages (self-employed workers paid 12.4%), up to a taxable maximum of $168,600. Next year, up to $176,100 of earnings will be subject to these taxes.

Any potential cost-of-living adjustment is incorporated into benefits at the start of the new year, meaning beneficiaries receive raises after they have already been facing higher prices for the goods and services they buy.
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“The COLA is so important to people because it is a reliable source of getting some extra income, and that is something that is highly valued in retirement,” said Mary Johnson, an independent Social Security analyst. “But at the same time, seniors are in a situation where it’s not going to be enough.”