Projected Social Security benefit increases through 2025: Key details on the impact on inflation

It is estimated that Social Security benefits could increase by 2.57% in 2025 due to the cost-of-living adjustment (COLA). In 2025, some retirees could get an additional $47 when their current average benefit is $1,480.

However, these increases may be affected if there are future increases in Medicare Part B premiums, which will be announced later this year. If the estimate is accurate, the cost-of-living adjustment (COLA) for 2025 would be slightly less than the 3.2% increase in benefits in 2024.

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How COLA works

Although some advise retiring in 2024 to lock in COLA benefits for that year, it is not necessary. If a person is 62 or older in 2024, they can automatically benefit from that year's COLA, even if they do not claim Social Security benefits until later. The Social Security Administration has assured that the COLA will be added when a person turns 62, regardless of when they begin benefitting.

Mary Johnson, an independent Social Security and Medicare policy analyst, said, “The COLA should not be used at all to determine retirement date because it is automatically included in Social Security's benefit calculation. In other words, the expected benefit amount is already adjusted for inflation before you apply,” the Detroit Free Press reported.

While there is not enough information for the final inflation adjustment, July inflation data provides an initial indication of the Social Security cost-of-living adjustment (COLA) for 2025. The Senior Citizens League forecast a 2.57 percent increase and Moody's chief economist Mark Zandi forecasts a similar 2.6 percent increase.

He also noted that inflation is easing as the effects of the pandemic and the Russia war fade. The Social Security Administration will announce COLA numbers in October after comparing this year's third quarter data with last year's. The U.S. Bureau of Labor Statistics will release the next inflation reports on September 11 for August and October 10 for September.

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Different social security benefits

Monthly Social Security retirement benefits depend on several factors, such as average earnings over the years, number of years worked, age at which benefits are claimed, and possibly the income of a spouse or divorced spouse. The Senior Citizens League conducted a survey in July that found that 71% of 2,016 seniors surveyed said the increases would deplete their savings, and 78% said most of their expenses were for essentials such as food, medicine, housing, etc.

Despite inflation, recent higher cost-of-living adjustments (COLAs) have proven beneficial. Johnson said, “An annual inflation adjustment is essential to protect the purchasing power of Social Security benefits.” She added, “Social Security is one of the few forms of retirement benefits that offers this protection. Although some pensions offer an inflation adjustment, investors pay more for this protection.”

Detroit has been hit pretty hard by inflation. Retirees of the former General Retirement System lost their 2.25% cost-of-living adjustments during the city's bankruptcy in 2014, and those adjustments have not been restored. Detroit's budget for this fiscal year, which begins July 1, included funds for a one-time lump sum payment to those retirees, but details on the amount and timing are pending.

Its 2025 budget of $10 million for one-time supplemental payments will be split evenly between the General Retirement System and the Police and Fire Retirement System.

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Importance of COLA during inflation

COLA became a crucial component during the pandemic-induced inflation period. Social Security benefits saw a 5.9% COLA increase in 2022 and an 8.7% increase in 2023, the largest since 1981. However, because COLA is adjusted only once a year, retirees experienced delays in receiving these increases, affecting their purchasing power.

Laurence Kotlikoff, an economist at Boston University, said: “Social Security's COLA delay means you get compensated for inflation that goes back as far as 15 months. When inflation was 8% a few years ago, the COLA delay reduced recipients' real benefits by about 4%. That's a huge blow.” That delay reduced real benefits by about 4%.

Factors likely to mitigate the COLA increase

Retirees should also factor in some additional costs even if current estimates prove correct. Most notably, Medicare Part B premiums, which are automatically deducted from Social Security benefits, are expected to rise from $174.70 to $185 per month in 2024. That $10.30 increase would reduce a potential $48 COLA increase to about $37.70 per month, or around $452 per year.

Another factor to consider is that Social Security benefits are taxed more heavily for those who work part-time or have substantial retirement savings. According to reports from the Social Security Administration, 40% of recipients must pay income tax on their benefits.