Social Security benefits in 2025: What retirees could see based on inflation and what to know

We've got two more months of inflation data to go. But right now, some estimate that Social Security benefits could see a 2.57% hike for the cost-of-living adjustment in 2025.

Some retirees might be looking at an extra $47 or so a month beginning in 2025 — if they receive the average benefit of around $1,840 a month. But, remember that would be before any increase in Medicare Part B premiums, which would be announced later in 2024.

It wouldn't be a huge gain, as inflation has been cooling off in the past year. And, if that estimate proves correct, the COLA hike would be down slightly from a 3.2% boost to benefits for more than 71 million people in 2024.

Overall, retirees and those receiving Supplemental Security Income benefits could see a fairly average increase.

What many don't understand about how COLA works

I've seen some questionable advice online, though, that implied it could be better to retire in 2024 than 2025 to lock in that COLA increase for next year. But that kind of advice doesn't make sense on the surface.

Most people do not realize that they automatically will benefit from next year’s COLA — even if they have not yet filed for Social Security — as long as they are at least 62 or older in 2024.

"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," said Mary Johnson, an independent Social Security and Medicare policy analyst who has been forecasting COLA hikes for several years.

"In other words, the prospective benefit amount is adjusted for inflation even before claiming it."

The Social Security Administration confirmed that people are eligible for cost-of-living benefit increases starting with the year they turn age 62. And that is true even if they don’t get benefits until their full retirement age, now age 67 for those born in 1960 or later, or if they even wait as long as possible to claim higher monthly benefits at age 70. Regardless of your full retirement age, Social Security notes, your monthly payment will be higher the longer you wait to apply, up until age 70.

"We add cost-of-living increases to their benefits beginning with the year they reach 62. Benefits are adjusted yearly to reflect the increase, if any, in the cost-of-living as measured by the Consumer Price Index," according to Darren Lutz, a spokesperson for the Social Security Administration.

More data will be needed for final inflation adjustment

The latest inflation numbers for July offer the first clue when it comes to forecasting the Social Security COLA calculation for 2025.

The Senior Citizens League, a nonpartisan advocacy group, issued the 2.57% estimate shortly after the July inflation data was released by the U.S. Bureau of Labor Statistics on Aug. 14.

Mark Zandi, chief economist for Moody's, said Moody's is estimating a 2.6% COLA increase, which is in line with the Senior Citizens League's figure.

"Inflation is moderating as the fallout from the pandemic and Russian war — which sparked the high inflation in 2021 and 2022 — is largely in the rearview window," Zandi said.

The Social Security Administration releases the actual figure for the cost-of-living adjustment each year in October after more inflation data is known.

This year's third-quarter inflation numbers will be compared with last year's third quarter to get to the upcoming COLA figure. The next round of consumer price index data for August will be released by the U.S. Bureau of Labor Statistics on Sept. 11. The CPI for September will be released Oct. 10.

The formula used to calculate the inflation adjustment each year is based on monthly changes for July, August and September for the Consumer Price Index for Urban Wage Earners and Clerical Workers.

More: Social Security cost of living boost in 2025? Early estimate calls for 2.6% increase

Social Security benefits vary significantly

How much money you receive in Social Security retirement benefits each month depends on a wide range of variables, including how much you've earned on average over the years, how many years you worked, the age at which you begin claiming benefits and even your spouse's earnings (or, possibly, a divorced spouse's earnings) may affect the final amount of your benefit.

Inflation has been a major headache for those on limited incomes.

Some 71% of the 2,016 seniors who took an online survey conducted by the Senior Citizens League in July said that one of their top retirement concerns is that persistent high prices from inflation would force them to deplete their savings. More than three-quarters, or 78%, said their monthly budget for essentials like housing, food and medicine was higher than last year.

The survey link was embedded in the group's bimonthly digital publication, and emails were sent to the group's subscriber list. The voluntary survey also was posted and boosted on the Facebook page for the Senior Citizens League.

A string of higher than normal COLA adjustments after inflation skyrocketed a few years ago will continue to help many seniors. Any upcoming COLA adjustment will be added on top of earlier hikes.

"An annual inflation adjustment is essential to help protect the buying power of Social Security benefits," Johnson said.

"Social Security," she noted, "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."

How city of Detroit retirees were hit hard by inflation

The city of Detroit's retirees who are covered by the legacy General Retirement System, for example, lost their 2.25% cost-of-living adjustments to their pensions as part of the city's bankruptcy in 2014. The cost of living adjustment has not been restored.

The city of Detroit's budget for this fiscal year included some money set aside to cover a one-time lump sum payment to legacy retirees. "The Board of Trustees has not yet been advised as to the manner and amount of the payments to the applicable retirees," according to Michael VanOverbeke, general counsel for the Detroit General Retirement System for nonuniform workers.

The city of Detroit's fiscal year began July 1. According to a statement from the Office of the Chief Financial Officer, more information should be known in the coming weeks regarding the exact amounts of the one-time payments or the average payment. The timeline for the payments would be known, as well, in the weeks ahead after a resolution is approved by City Council.

The fiscal year 2025 budget, approved by City Council in April, includes an appropriation of $10 million — which breaks down to $5 million for the General Retirement System and $5 million for Detroit's Police and Fire Retirement System for a one-time supplemental retiree pay.

The next step, the statement noted, is for the administration to send a resolution to City Council to authorize the supplemental retiree pay using the appropriation in the budget. "The Duggan administration in keeping a promise to retirees, added the one-time supplement to this fiscal year’s budget recognizing the sacrifices that were made by retirees," according to a statement from the city Office of the Chief Financial Officer.

Some dramatic COLA hikes in 2022 and 2023

COLA news grabbed headlines as inflation skyrocketed after supply chain disruptions and higher demand during the pandemic.

In 2022, the cost-of-living adjustment for Social Security benefits was 5.9%.

In 2023, retirees and others saw an 8.7% COLA bump for Social Security benefits, as well as Supplemental Security Income benefits. That was the biggest inflation adjustment since 1981 when the COLA hike was 11.2%.

Even so, the delays in the timing for when retirees see a boost in benefits, based on inflation, hurt many households.

The cost-of-living adjustment for Social Security benefits is only made once a year, not once a month or even once a quarter, meaning retirees and others had to wait more than a year to see their benefits go up as inflation skyrocketed, according to Boston University economist Laurence Kotlikoff.

That process left many retirees, he said, "behind the eight ball" when it came to covering their bills and paying the higher costs of housing and groceries in the past few years.

"Social Security's COLA lag means that you are being compensated for inflation that occurred as far back as 15 months," Kotlikoff said.

"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," he said.

Inflation has come down, Kotlikoff said, but it's time to get the cost-of-living adjustment fixed so there aren't such dramatic lags the next time inflation takes off. More timely adjustments throughout the year, not just a once-a-year-adjustment, would help seniors.

What will cut into the COLA hike

Even if the inflation adjustment turns out as estimated now, retirees still have to consider some extra costs.

Medicare Part B premiums are automatically deducted from Social Security benefits, Johnson noted, and earlier this year the Medicare Trustees forecast that the Part B premium would rise to $185 per month from $174.70 in 2024. The $10.30 increase would reduce a potential $48 hike in COLA to around $37.70 a month —  or roughly $452 a year.

Another issue: More older taxpayers pay a rising amount of tax on their benefits whenever their benefits go up.

Many who hold part-time jobs in retirement or had built up retirement savings are paying taxes on a portion of their Social Security benefits. About 40% of people who get Social Security have to pay income taxes on their benefits, according to a report issued by the Social Security Administration .

The income thresholds that trigger the tax on a portion of Social Security benefits do not adjust for inflation. These two brackets are fixed at their 1983 nominal values.

When it comes to federal income taxes, the magic number is $25,000 in combined income for singles and $32,000 for couples filing a joint return.

For single filers, the threshold for when you'd have to pay taxes on 50% of Social Security benefits applies when your combined income is between $25,000 and $34,000 a year. After that, up to 85% of benefits is taxable.

Couples filing a joint return could have to pay taxes on 50% of their Social Security benefits if their combined income is between $32,000 and $44,000. If the couple's combined income is higher than that, up to 85% of benefits is taxable.

When calculating your federal income taxes, you're looking for your combined income, which is your adjusted gross income, plus nontaxable interest, such as interest on certain bonds, plus half of your Social Security benefits received that year.

The combined income will take into account any earnings from a job, income from your investments, taxable withdrawals from traditional 401(k) plans and other taxable income.

Contact personal finance columnist Susan Tompor: stompor@freepress.com. Follow her on X (Twitter) @tompor.

This article originally appeared on Detroit Free Press: Social Security benefits in 2025: What retirees could see based on inflation and what to know