An unpleasant surprise awaits some Social Security beneficiaries in the new year

Social Security is a program that most retirees can’t live without. According to an analysis by the Center on Budget and Policy Priorities, America’s best retirement programs have cut the poverty rate among adults 65 and older by nearly three-quarters, from about 38.7% without Social Security to 10.2% without Social Security. Reduced. 2022.

An annual survey conducted by Gallup for more than 20 years confirms how important Social Security income is to the financial well-being of retirees. Since 2002, 80% to 90% of retirees say their monthly Social Security check is a “major” or “secondary” part of their income, compared to 88% by 2024. Most older workers need guaranteed payments to make ends meet. .

Given how important Social Security is to seniors, it’s no surprise that the release of the program’s cost-of-living adjustments (COLAs) is one of the most anticipated announcements every year. The veil has been lifted on Social Security’s 2025 COLA, but unpleasant surprises still await some beneficiaries in the new year.

Image source: Getty Images.

Social Security’s COLA serves an important purpose.

The program’s COLA, which you hear about all the time, involves benefit adjustments that apply most years to account for the inflationary pressures beneficiaries are experiencing.

For example, if the price of a basket of goods and services that retirees regularly purchase increases by 2%, benefits must also increase by 2% to ensure that program beneficiaries can still purchase the same amount of goods and services. Social Security’s cost-of-living adjustments are “increases” designed to keep benefits the same as their prevailing levels. inflation rate.

Before 1975, Social Security’s COLAs were assigned at random by special sessions of Congress. Only 11 COLAs were delivered between January 1940 and the first retired worker checks sent in January 1974. But when these cost-of-living adjustments were implemented, they were often odd, such as the 77% increase in 1950.

Since 1975, the Consumer Price Index for Urban Wage and White Collar Workers (CPI-W) has been Social Security’s measure of inflation used to calculate COLA each year. It boasts over 200 individual spending categories, all with unique weights.

CPI-W is reported monthly by the U.S. Bureau of Labor Statistics, but only trailing 12-month figures for months ending July, August, and September (i.e., the third quarter) are factored into the COLA calculation. If the average CPI-W figure in the third quarter of this year increases compared to the comparable period in the previous year, this will lead to inflation and increase benefits in the following year.

The year-over-year increase in the average CPI-W number for the third quarter (rounded to the nearest tenth) represents the COLA passed to beneficiaries.

A notable rise in the general inflation rate has resulted in four consecutive years of above-average COLAs. US inflation rate data from YCharts.

The fourth consecutive average cost-of-living adjustment is headed in beneficiaries’ direction.

Throughout the 2010s, Social Security recipients had little to look forward to. There were three years of deflation (i.e. prices falling every year) and COLA was not passed (2010, 2011, 2016). Additionally, the smallest positive COLA on record was implemented in 2017 (0.3%).

But things have changed quite dramatically in the last decade. Abundant fiscal stimulus during the COVID-19 pandemic caused the U.S. money supply to surge, ultimately succumbing to the highest inflation rates seen in 40 years. This results in COLAs of 5.9% in 2022, 8.7% in 2023 (the highest by percentage since 1982), and 3.2% in 2024.

Although inflation rates are currently decreasing, that hasn’t stopped Social Security’s 2025 COLA from once again exceeding recent averages. While the average cost-of-living adjustment over the past 15 years has been just 2.3%, beneficiaries are expecting a 2.5% increase next year.

According to estimates from the Social Security Administration, a 2.5% COLA would translate to a $49 monthly increase for the average retired worker, increasing the 2025 payment to $1,976. Meanwhile, the average disabled worker and the average surviving beneficiary will see their respective payments increase by $38 per month, to about $1,580 and $1,551 in the new year.

Image source: Getty Images.

An unexpected number of retirees will be in for an unexpected surprise in 2025.

On the surface, things seem pretty good for Social Security retired worker beneficiaries. But dig a little and you’ll see that Social Security’s 2025 COLA is a double-edged sword.

Larger benefits are generally a welcome sight for retirees. However, as Social Security checks have grown over time, a greater percentage of retired workers have become subject to federal taxation on their benefits. yesPart of your Social Security check may be taxed at the federal level and in nine states.

By 1983, Social Security’s asset reserves (excess earnings collected since its inception that were not paid out in benefits or used to cover administrative costs) were all but gone. Major benefit cuts may have been necessary if elected officials had not taken action.

The 1983 Social Security Amendments gradually increased workers’ full retirement age and payroll taxes and introduced taxation of benefits. Since 1984, up to 50% of the benefit may be taxed at federal rates if the provisional income (adjusted gross income + tax-exempt interest + half of the benefit) for single filers or married couples filing jointly exceeds $25,000 and $32,000. each. In 1993, the Clinton administration added a second tax bracket that allowed benefits to be taxed at up to 85% for single filers and married couples with provisional income exceeding $34,000 and $44,000, respectively.

What’s unique about these provisional income standards is that they have never been adjusted for inflation. When the original tax brackets were introduced 40 years ago, they were expected to apply to only about 10% of all households receiving benefits. However, as COLA continues to increase payments over time, a greater percentage of retiree households are subject to this tax. The 2.5% COLA in 2025 will expose more retirees to this disgusting tax.

Most seniors would like to see taxes on their Social Security benefits withheld, but the reality is that these taxes aren’t going anywhere. or Adjusted for inflation after several decades. The program is closing a $23.2 trillion funding gap by 2098, according to the 2024 Social Security Board of Governors report. Social Security needs all the income you can earn, and that includes federal taxation on your benefits.