Social Security 2025 benefits expected to increase: Key details on inflation impact

The estimates suggest that Social Security benefits could witness a hike of 2.57% for the cost-of-living adjustment (COLA) in 2025. In 2025, some retirees might get an extra $47 if they currently receive $1,480 as their average benefit.

However, these hikes can be affected if there are any hikes in future in the 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 a bit less than the 3.2% increase that benefits received in 2024.

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How COLA works

While some advice is to retire in 2024 to secure the benefits of COLA for that year, it is not necessary. This is because if an individual is 62 or above in 2024 they will automatically be able to benefit from that year’s COLA even if they claim the Social Security benefits later. The Social Security Administration assured that COLA is added when a person turns 62 regardless of when start benefitting from it.

Mary Johnson, an independent Social Security and Medicare policy analyst said, “The COLA should not be used to determine a retirement date at all because it is automatically factored into the benefit calculation used by Social Security. In other words, the prospective benefit amount is adjusted for inflation even before claiming it,” as reported by Detroit Free Press.

While there is insufficient information for the final inflation adjustment, the July inflation data gives an early hint about the Social Security cost-of-living adjustment (COLA) for 2025. he Senior Citizens League predicted an increase of 2.57% and Moody's chief economist, Mark Zandi, predicts a similar 2.6% rise.

He also noticed that inflation is slowing down as the impact of the pandemic and the Russian war is fading. The Social Security Administration will announce the COLA figures 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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Varying Social Security benefits

The monthly Social Security retirement benefits vary on several factors such as average earnings over the years, the number of years worked, the age at which they start claiming benefits, and possibly their spouse’s or divorced spouse’s earnings. Senior Citizens League conducted a survey in July which reported 71% of the 2,016 seniors surveyed that the hikes would deplete their savings and 78% reported that most of their expenses are on essential items like food, medicine, housing, etc.

Despite inflation, recent higher cost-of-living adjustments (COLA) have been beneficial. Johnson said, “An annual inflation adjustment is essential to help protect the buying power of Social Security benefits.” She added, “Social Security is one of the few forms of retirement benefits that provide this protection, although some annuities offer an inflation adjustment, investors pay more for that protection."

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

Their 2025 budget of $10 million for one-time supplemental payments is divided evenly between the General Retirement System and the Police and Fire Retirement System.

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COLA’s prominence during inflation

COLA became a crucial component during the inflation period due to the pandemic. Social Security benefits saw an increase of 5.9% COLA in 2022 and an 8.7% increase in 2023, the largest recorded since 1981. However, since COLA is adjusted only once a year, retirees faced delays in receiving these increases which impacted their buying ability.

Boston University economist Laurence Kotlikoff said, “Social Security's COLA lag means that you are being compensated for inflation that occurred as far back as 15 months. When inflation was running at 8% a few years back, the COLA lag reduced recipients' real benefits by roughly 4%. That's a huge hit.” This lag reduced real benefits by about 4%.

Factors likely to diminish COLA hike

The retirees should also consider some extra costs even if the predicted estimates right now turn out to be true. Foremost, Medicare Part B premiums, which are automatically deducted from Social Security benefits, are projected to increase from $174.70 to $185 per month in 2024. This $10.30 rise would reduce a potential $48 COLA increase to about $37.70 per month, or roughly $452 annually.

Another factor to consider is there are higher taxes on Social Security benefits for those who are working part-time jobs or have substantial retirement savings. According to reports by the Social Security Administration 40% of the recipients have to pay income taxes on their benefits.

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