Everything changes again in 2025 COLA projections – retirees change their minds

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Understanding how much your Social Security benefits will increase each year is very important, especially for retirees. The Cost of Living Adjustment (COLA) decides this increase. Recently, there have been new predictions from the Senior Citizens League (TSCL), a large nonpartisan senior group in the United States.

They estimate that the COLA for 2025 might be between 2.6% and 3%. This is lower than the 3.2% increase for 2024. However, there are reasons why this lower increase might actually be good news for retirees.

What is COLA?

The Cost of Living Adjustment (COLA) is an annual change in Social Security benefits. It is meant to keep up with the rising costs of goods and services. For example, if prices go up, Social Security benefits should also go up to help people afford the same things. COLA is important because it helps retirees maintain their purchasing power.

Why a Lower COLA Might Be Good

Inflation and Purchasing Power

A higher COLA usually means higher inflation. Inflation is when prices go up over time, which can reduce the value of your money. For retirees, this is a big deal because their benefits might not keep up with rising prices.

According to TSCL, the purchasing power of Social Security benefits has dropped by almost 36% since 2000 due to inflation. This means that retirees can’t buy as much with their benefits as they used to.

Taxation of Social Security Benefits

Another reason why a lower COLA might be better is taxes. Social Security benefits can be taxed based on your income. If your benefits go up a lot, your income might go up too, which could mean higher taxes. Here’s a simple breakdown:

  • If you are single and your income is less than $25,000, your benefits are not taxed.
  • If your income is between $25,000 and $34,000, up to 50% of your benefits can be taxed.
  • If your income is more than $34,000, up to 85% of your benefits can be taxed.

For couples, the income limits are slightly higher. These limits have not changed in over 30 years, so even if benefits go up, the tax rules stay the same. A lower COLA can help you keep more of your benefits without paying more taxes.

What to Expect in 2025

Economists and TSCL predict that the COLA for 2025 will likely be below 3%. This is because the cost of goods and services hasn’t changed much recently. Even though a lower COLA might seem disappointing at first, it can help retirees in the long run. A steady and low inflation rate helps keep the value of Social Security benefits stable.

FAQs

What is the Cost of Living Adjustment (COLA)?

COLA is an annual increase in Social Security benefits to keep up with inflation.

Why is a lower COLA sometimes better?

A lower COLA means lower inflation and less chance of paying more taxes on Social Security benefits.

How is COLA calculated?

COLA is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

What was the COLA for 2024?

The COLA for 2024 was 3.2%.

What is the predicted COLA for 2025?

The predicted COLA for 2025 is between 2.6% and 3%.

Understanding the Cost of Living Adjustment (COLA) is crucial for anyone relying on Social Security benefits. While a lower COLA might seem like bad news, it can actually help retirees by reducing inflation’s impact and keeping more benefits tax-free. With a predicted COLA of less than 3% for 2025, retirees can look forward to more stable purchasing power.

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