A Larger Social Security Increase Next Year May Have Unintended Consequences!
The annual Social Security cost-of-living adjustment (COLA), announcement is just four months away. But it’s not too soon to begin reading the signs to mentally prepare for what could be in store.
The COLA for 2024 fell significantly to 3.2% from 8.7% in the previous year. However, the 2025 COLA could be bigger than the 2024 increase.
A larger COLA might seem to be a reason to celebrate. But there are some important reasons why it could be bad news for retirees.
In February, The Senior Citizens League (TSCL) estimated that the Social Security COLA in 2025 would be 1.75%. The following month, TSCL’s estimate rose to 2.4%. But it now seems possible the increase could be bigger in 2025 than it was this year.
On Wednesday, the Bureau of Labor Statistics (BLS) reported inflation data for March 2024, and the numbers came in hotter than expected.
Most news organizations focused on the Consumer Price Index for All Urban Consumers (CPI-U), sometimes called the headline inflation number. It jumped by 3.5% year over year, higher than the 3.2% increase in February.
However, Social Security COLAs are based on another inflation metric, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). It surged 3.5% higher, too.
The Social Security Administration (SSA) compares CPI-W numbers from the third quarter to the same period in the previous year to calculate the annual COLA. If inflation remains at the March levels, the raise for Social Security beneficiaries will be higher instead of lower, as previously forecast.
So why it could be bad news for retirees??
Benefit adjustments for 2025 go into effect next January. But you’ll pay the higher prices in the meantime. The time value of money isn’t your friend with Social Security COLAs. Any money you receive in the future isn’t worth as much as money in your hands now.
This is a chronic issue with Social Security COLAs. It’s more problematic, though, when inflation is higher. Unfortunately, inflation is now rising instead of declining.
Also, the CPI-W metric used by the SSA to calculate COLAs doesn’t fully reflect the healthcare costs incurred by retirees. Digging into the BLS’ March data shows that seasonally adjusted costs of medical care increased significantly.
If healthcare costs are going up (and they are) but aren’t adequately addressed in the COLA, retirees’ real buying power could actually be lower after receiving the Social Security increase.
A lot can change between now and the third quarter. The Senior Citizens League’s latest estimate of the 2025 COLA appears to reflect this. The organization now predicts an increase of 2.6%. While that’s higher than its previous estimate, it’s still lower than the 3.2% COLA retirees received in 2024.
Learning how to maximize your Social Security benefits which includes understanding how Social Security gets taxed, strategies to reduce taxable income to lower tax on benefits and considering the timing of benefits and other income sources could help you retire with clarity, confidence and peace of mind.
Scott Rosen is the Executive Vice-President and Research Champion of the IFW. Scott is a 30-year veteran of the financial services industry.
