2025 COLA Projections Change Again – Retirees Reconsider

Juilia Ruskin
4 Min Read

The Cost of Living Adjustment (COLA) is an important factor for retirees and Social Security beneficiaries because it determines the yearly increase in Social Security benefits. The Senior Citizens League (TSCL), a major nonpartisan senior group, has recently released new projections for the 2025 COLA.

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What is the Expected COLA for 2025?

According to the Senior Citizens League, the COLA for 2025 is predicted to be between 2.6% and 3%, which is lower than the 3.2% COLA set for 2024. While this may seem disappointing to many seniors, there are several reasons why a lower adjustment might actually be beneficial.

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Retirees’ Perspective on COLA

A higher-than-average COLA usually indicates higher-than-average inflation. High inflation reduces the value of Social Security benefits, decreasing their purchasing power. For example, retirees who started receiving benefits in 2000 have seen their purchasing power drop by almost 36% due to inflation. This happens because the Social Security Administration (SSA) calculates COLA based on past living expenses, making it hard for seniors to make their benefits last during times of high inflation.

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Interestingly, when inflation is low and stable, Social Security’s purchasing power tends to increase. Since 2010, there have been periods where COLA was less than 3%, leading to a 13% overall increase in purchasing power. Therefore, a gradual rise in benefits, even with a lower COLA, can be good for retirees.

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Tax Implications of COLA

Another important aspect to consider is how Social Security benefits are taxed. A high COLA can increase retirees’ combined income, making more of their Social Security benefits taxable. The combined income metric includes adjusted gross income (AGI) plus non-taxable interest and half of Social Security benefits. Here’s a breakdown:

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Taxable Percentage of Benefits

Combined Income (Individual)Combined Income (Couples)Taxable Percentage
Less than $25,000Less than $32,0000%
$25,000 to $34,000$32,000 to $44,000Up to 50%
More than $34,000More than $44,000Up to 85%

These thresholds have not been adjusted for over 30 years, so they don’t take inflation into account. As benefits increase, so does taxable income, leading to higher taxes for seniors. A lower COLA can help retirees avoid higher taxes, allowing them to keep more of their Social Security benefits.

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Projections for 2025

The Senior Citizens League’s predictions are based on recent higher-than-expected Consumer Price Index (CPI) statistics, which showed a 3.3% year-over-year increase. This suggests that inflation may not decrease significantly, leading to a likely COLA below 3% for 2025. Although this is lower than the 2024 adjustment, it could help preserve the purchasing power of Social Security benefits, providing a more stable financial situation for retirees.

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Positive Outcomes of a Lower COLA

While a lower COLA might initially seem disappointing, it offers several advantages. Lower inflation means that the real value of Social Security benefits is more likely to remain stable or even increase. Retirees can enjoy a better balance between their income and living expenses, without the strain of high inflation.

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FAQS

What is the projected COLA for 2025?

The projected COLA for 2025 is between 2.6% and 3%.

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How does a lower COLA benefit retirees?

A lower COLA can preserve purchasing power and reduce taxable income.

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Why are COLA thresholds not adjusted for inflation?

The thresholds haven’t been revised in over 30 years, ignoring inflation.

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What is the impact of high inflation on Social Security benefits?

High inflation reduces the purchasing power of Social Security benefits.

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Will a lower COLA mean less money for retirees?

Not necessarily; it can help maintain the real value of benefits.

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An up-and-coming tax attorney passionate about educating readers on tax planning and mitigation strategies. Juilia articles offer practical advice and actionable tips to help individuals and businesses navigate the intricacies of tax law with confidence.
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