Social Security Administration Announces 2.5% COLA Increase for 2025
Key Points – Social Security Administration Announces 2.5% COLA Increase for 2025
- A 2.5% COLA Increase for 2025
- Year-by-Year COLA Increases
- The Purpose of COLAs
- How Medicare Part B Premiums Impact COLAs
- 4-Minute Read
A 2.5% COLA Increase for 2025
On October 10, the Social Security Administration announced that more than 72.5 million Americans will receive a 2.5% cost-of-living adjustment (COLA) increase to their benefits in 2025.1 That equates to about $50 per month, which was similar to the COLA increase for 2024.
The 2.5% COLA increase will go into effect in January 2025 for about 68 million Social Security beneficiaries. There are also about 7.5 million people who receive Supplemental Security Income (SSI) payments that will see an increase to their payments starting on December 31, 2024. Keep in mind that there are some people who are Social Security and SSI recipients.
Year-by-Year COLA Increases
The 2.5% COLA increase for 2025 is the smallest annual increase since 2021, when Social Security beneficiaries saw a 1.3% bump in their benefits. Look at Figure 1, below, to see how the COLA increase for 2025 compares to COLA increases from the past several years.
FIGURE 1 – COLA Increase Year by Year – CNBC/Social Security Administration2
The Purpose of COLAs
While the cost-of-living adjustment is technically an increase, we caution people from thinking of it as such. Instead, think of your COLA as a buoy to keep up with inflation. That’s exactly what COLAs are designed to do. COLA increases are calculated by the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the third quarter of the last year a COLA was determined to the third quarter of the current year.3
Look at Figure 1 again. Notice how there was no COLA for 2010, 2011, and 2016, but it was 8.7% in 2023. Now, look below at Figure 2. The average inflation rates for 2009, 2010, and 2015 were -0.4%, 1.6%, and 0.1%, respectively, so subsequently there were no COLA increases the following years. Since the average inflation rate was 8.0% in 2022, it shouldn’t have been a shock that there was an 8.7% COLA increase for 2023.
The Correlation Between COLAs and Medicare Part B Premiums
Another reason why you shouldn’t think of a COLA increase as a boost in income is because of the pace of rising medical costs. Medicare Part B premiums are automatically deducted from Social Security benefits for most people.5
The Medicare Part B standard premium is $174.7 per month for 2024, and it’s projected to be around $185 per month for 2025.6 So, if you get about $50 more a month from the 2.5% COLA increase for 2025, about 20% ($10.30) of it could be getting wiped out just from the projected increase in the standard Medicare Part B premium.
The Hold Harmless Provision
The Social Security Administration collaborates with the Centers of Medicare & Medicaid Services to help prevent reductions in Social Security benefits reduced due to increases in their Medicare Part B premiums. This is known as the hold harmless provision.7
However, there are a few exceptions to this provision. It doesn’t apply when you enroll in Medicare Part B for the first time or if you pay an income-related monthly adjustment amount (IRMAA) premium, which is calculated based on your Modified Adjusted Gross Income from two years prior. The final exception is if you’re Medicaid eligible and have your premium covered by a state Medicaid agency.
Other Social Security Adjustments Besides the COLA Increase for 2025
Along with the COLA increase for 2025, there are notable annual Social Security-related adjustments based on the increase of average wages that will go into effect in January. The maximum amount of earnings subject to the Social Security tax will increase from $168,600 in 2024 to $176,100 in 2025.8
Determining Your Social Security Claiming Strategy
As you assess the impact of the 2.5% COLA increase for 2025, it’s important to understand that the longer you wait to claim Social Security, the larger your benefit will be. The decision of when you (and your spouse, if you’re married) decide to claim your benefits will likely be more impactful than the annual COLAs.
Social Security Decisions Guide
Also, you need to understand how your Social Security benefits are taxed in relation to your other forms of retirement income. To determine what percentage of your benefits are taxable, you’ll take half of your Social Security benefits and add it to all your other taxable income (pensions, IRA withdrawals, investment income, etc.). You’ll also have to add in any tax-exempt interest income. The sum of these numbers amounts to your provisional income.
If your provisional income is more than $34,000, you could need to pay income tax on up to 85% of your benefits. If your provisional income is between $25,000-$34,000, up to 50% of your benefits could be taxable. Keep in mind that there is one form of income that doesn’t count toward provisional income—distributions from Roth IRAs.
Working with a Team of Professionals to Help Determine How the 2.5% COLA Increase for 2025 Could Impact You
Medicare premiums and taxes are two factors to consider when determining when to claim Social Security. The decision of when to start claiming your benefits is significant. That’s part of why it’s important to work with a team of wealth management professionals.
Our team is comprised of CFP® Professionals, CPAs, insurance specialists, estate planning specialists, and company retirement plan specialists. These team members work together on many planning strategies—including when to claim Social Security—to build a financial plan that’s tailored to an individual’s financial and life goals. To learn more about our team approach and what the 2.5% COLA increase for 2025 could mean for you, start a conversation with us below.
Resources Mentioned in This Article
- Maximizing Social Security Benefits
- Social Security Administration Announces 3.2% COLA Increase for 2024
- Healthcare Costs During Retirement
- Is Medicare Free?
- What Is IRMAA? Medicare Income-Related Monthly Adjustment Amount
- 5 Long-Term Strategies for a Better Retirement
- Taxes on Retirement Income
- Are Retirement Benefits Taxable?
- Pension Plans: Defined Benefits Plans vs. Defined Contribution Plans
- The IRA Early Withdrawal Penalty: How to Avoid the 10% Penalty
- What Should I Invest My Money In?
- Why You Need a Financial Planning Team with Jason Gordo
- Taxes on Roth IRAs
Downloads
Other Sources
[1 and 8] https://blog.ssa.gov/social-security-announces-2-5-percent-benefit-increase-for-2025/
[2] https://www.cnbc.com/2024/10/10/social-security-cost-of-living-adjustment-for-2025-what-to-know.html
[4] https://www.usinflationcalculator.com/inflation/current-inflation-rates/
[6] https://finance.yahoo.com/news/social-security-cola-2025-7-211134060.html
[7] https://blog.ssa.gov/how-the-hold-harmless-provision-protects-your-benefits/
Investment advisory services offered through Modern Wealth Management, Inc., a Registered Investment Adviser.
The views expressed represent the opinion of Modern Wealth Management a Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.