By Caitlin Cahalan, TheStreet, 2024-09-02
Sixty-eight million Americans receive Social Security Insurance (SSI) payments each month, and most retirees (58%) note that Social Security is a significant source of income in retirement.
Therefore, it is crucial that these payments cover basic expenses, especially during times of stubborn inflation. The federal government provides a Cost of Living Adjustment (COLA) to ensure that the purchasing power of Social Security payments isn't diminished by inflation and the rising cost of living.
Related: Social Security benefits report confirms major changes are coming
The past few years of consistent inflation have prompted the Social Security Administration to seriously reevaluate the current COLA. While the COLA is adjusted annually, years of sustained inflation typically prompt higher adjustments.
1979-1981, 1990, 2008, 2022, and 2023 have seen some of the most significant COLA increases on record, and all periods are associated with recessions or abnormally high inflation
Experts are now bracing for the possibility that the 2025 COLA — which will officially be announced in October — will be another historic high.
Current Social Security COLA and anticipated changes
In October 2023, the Social Security Administration announced it would implement a 3.2% Cost of Living Adjustment (COLA), effective January 2024. This change increased the average Social Security payment by $50 per month.
This update also increased the annual earnings limit of retirees below the full retirement age to $22,320 and those at full retirement age, 67, to $59,520. Those older than 67 or above are not subject to an earnings limit.
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- Social Security benefits report confirms major changes are coming
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- How average Americans can better plan for 401(k), retirement income
The Social Security Administration also considers the rate of wage growth when determining COLA. Based on national wage increases, the maximum earnings subject to Social Security taxes increased from $160,200 to $168,600.
Experts anticipate 2025's COLA could land between 2.57% and 2.70%, depending on how the Consumer Price Index closes out Q3 2024. If a COLA of 2.7% is granted, it would mark the first time in over thirty years that a COLA has been 2.7% or above for four consecutive years.
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How an increased COLA could affect retirees
Social Security is one of the few retirement income streams protected against inflation. Cost of Living Adjustments (COLA) allow retirees to maintain their independence and age with dignity.
Related: The average American faces one major 401(k) retirement dilemma
Those who delay receiving Social Security until full retirement at 67 may also enjoy significantly higher monthly payments due to the compounding effects of a higher Primary Insurance Amount (PIA), which in turn increases COLA amounts and Delayed Retirement Credits (DRC).
While COLA increases the average monthly Social Security payment, it also increases Medicare premiums. For example, the 2024 COLA raised the Medicare Part B monthly rate from $164.90 to $174.70 and the annual deductible from $226 to $240.
Half of retirees owe some kind of tax on their Social Security benefits, and the latest COLA may also increase the amount of taxes owed. Understanding the latest COLA can help retirees adjust their 401(k) and IRA withdrawals and update their budgets and accordingly.
Related: Veteran fund manager sees world of pain coming for stocks
