The Cost of Living Adjustment (COLA) is a yearly change in Social Security benefits, important for retirees and Social Security beneficiaries. The Senior Citizens League (TSCL) has made new predictions for the 2025 COLA. This article will explain what these predictions mean and how they might affect retirees.
The 2025 COLA is expected to be between 2.6% and 3%, which is lower than the 3.2% COLA for 2024. While some seniors might be disappointed, a lower COLA can be beneficial.
When COLA is high, it usually means inflation is high too. High inflation reduces the value of Social Security benefits, making it harder for retirees to afford what they need. For example, since 2000, the purchasing power of benefits has dropped by about 36% due to inflation.
However, when inflation is low and stable, the purchasing power of Social Security benefits tends to go up. Since 2010, there have been times when COLA was less than 3%, and this has led to a 13% increase in purchasing power overall. So, even if COLA is lower, it can help retirees manage their finances better.
Tax Implications
High COLA can also lead to higher taxes on Social Security benefits. When benefits increase, retirees’ combined income can go up, making more of their benefits taxable. Here is how it works:
Taxable Percentage of Benefits:
0% taxable: Less than $25,000 (individual) or less than $32,000 (couples)
Up to 50% taxable: $25,000 to $34,000 (individual) or $32,000 to $44,000 (couples)
Up to 85% taxable: More than $34,000 (individual) or more than $44,000 (couples)
These income thresholds haven’t changed in over 30 years, so as benefits go up, so do taxes. A lower COLA can help retirees avoid higher taxes, letting them keep more of their benefits.
Projections for 2025
The Senior Citizens League’s predictions are based on recent Consumer Price Index (CPI) numbers, which showed a 3.3% increase over the past year. This suggests that inflation may not drop much, so the COLA for 2025 will likely be below 3%. While this is lower than the 2024 COLA, it could help maintain the value of Social Security benefits and provide financial stability for retirees.
Positive Outcomes
While a lower COLA might seem disappointing, it has benefits. Lower inflation means the real value of Social Security benefits can stay the same or even increase. This can help retirees balance their income and expenses better, without the stress of high inflation.
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Elena is a seasoned tax consultant with a decade of expertise in income tax management. Graduating with top honors in Finance, she embarked on a career journey focused on simplifying tax complexities. Elena's insightful articles on thecsc.org provide practical guidance to taxpayers.
