Expected Increase in Social Security Payments for 2025: What You Need to Know

  August 14, 2024    Buddieizreal

---

 Expected Increase in Social Security Payments for 2025: What You Need to Know

The Social Security Administration (SSA) has just released the first of three key figures that will determine the 2025 cost-of-living adjustment (COLA), and it suggests that next year’s increase in monthly benefits may be more modest than in previous years.

In July, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) saw a 2.9% rise compared to the same month last year. This index is a critical factor in calculating the COLA, which is based on the changes in this inflation measure from July through September each year. The final COLA for 2025 will be announced in October.

For 2024, the COLA increased monthly Social Security benefits by 3.2%, following a period of heightened inflation. Alicia Munnell, director of the Center for Retirement Research at Boston College, notes that if inflation continues to cool, the 2025 COLA could range between 2.6% and 2.9%. “People are still frustrated by high prices,” she observes, “but it appears we’re slowly moving past the worst of the inflation.”

Sri Reddy, Senior Vice President for Retirement and Income Solutions at Principal Financial Group, echoes this cautious optimism. “Both general and core inflation have seemed to stabilize at around 3% in the first half of this year,” Reddy states. “Unless significant economic events disrupt this trend, the 2025 Social Security COLA is likely to fall between 2.75% and 3.25%.”

A COLA aligned with the July CPI-W figure of 2.9% would mean an increase of about $54 per month for the average Social Security retirement benefit, which was approximately $1,870 in June 2024. Similarly, the average monthly survivor benefit ($1,508 in June) would rise by $44, and the average Social Security Disability Insurance (SSDI) payment ($1,538 in June) would increase by $45.

The 2024 COLA had provided an extra $59 per month for the average retiree, reflecting a sharp decrease from the previous year’s 8.7% COLA — the largest increase since 1981 — which was driven by a significant spike in consumer prices.

David Certner, AARP’s Legislative Counsel and Policy Director, emphasizes the importance of the COLA for retirees: “Social Security is often the only income that adjusts for inflation, making it crucial for seniors. Whether the increase is large or small, AARP has long fought to preserve the COLA, ensuring seniors can keep up with rising costs throughout their retirement.”

The CPI-W tracks the price changes in a specific basket of goods and services, including essentials like food, energy, and medical care. This index, reported monthly by the Bureau of Labor Statistics, is a subset of the broader Consumer Price Index (CPI), which serves as the main indicator of inflation. In July, the broader CPI also rose by 2.9% year over year, down slightly from 3% in June.

To determine the COLA, the SSA compares the average CPI-W for the third quarter of the current year to the same period from the previous year.

In 2023, the CPI-W rose 2.6% in July, 3.4% in August, and 3.6% in September. This led to an average increase of 3.2% for the quarter compared to the same period in 2022, resulting in the COLA that took effect in January 2024.

While a 3% COLA in 2025 would be the smallest since 2021, it is consistent with pre-pandemic trends, when inflation was relatively stable. Between 2001 and 2020, the average COLA was around 2.2%. In years without inflation, such as 2009, 2010, and 2015, there was no COLA. The highest adjustment on record was 14.3% in 1980.

Social Security benefits may lag behind inflation during periods of rapid price changes, depending on the direction of the CPI, but “over the long term, it does offer protection,” says Munnell, who has extensively researched the issue.

For instance, beneficiaries experienced a loss of purchasing power in 2021 when the 1.3% COLA — based on low inflation in 2020 — was overtaken by surging consumer prices. This pattern continued in 2022, with a 5.9% benefit increase being outpaced by 9% inflation. However, beneficiaries have mostly caught up as inflation has decreased over the past two years.

“The COLA directly reflects national inflation data, ensuring it offsets price increases since the last adjustment,” explains Emerson Sprick, Associate Director of Economic Policy at the Bipartisan Policy Center. “Because of relatively stable prices this year, beneficiaries should expect only a moderate adjustment in 2025 — a welcome change from recent years.”

It’s also important to note that Medicare costs can impact the COLA’s effectiveness as a hedge against inflation. For instance, if Medicare Part B premiums increase in 2025, it could reduce the net COLA benefit for recipients who have these premiums deducted from their Social Security payments, which is the case for most Medicare enrollees.

In their 2024 annual report, Medicare trustees estimated that the standard Part B premium could rise from $174.70 per month to $185 in 2025, potentially reducing the COLA increase by $10.30 per month for those affected. However, this estimate is preliminary, and the final premium will be announced in the fall.

Social Security trustees have also highlighted a looming financial challenge for the program, projecting that without congressional intervention, benefits could be reduced by 17% by 2035. Sprick cautions that while COLAs are important, the program’s long-term financial stability is the bigger concern. “We sometimes place too much emphasis on COLAs,” he says. “The real threat to older Americans’ financial security is the potential funding shortfall in Social Security.”