The slowing inflation patterns should mean a significantly less cost-of-living increase for older persons in 2019.
The Senior Citizens League (TSCL), a nonpartisan, nonprofit seniors advocacy organization, conducted study and projected that Social Security’s cost-of-living adjustment (COLA) in 2025 will be 1.75% based on Tuesday’s consumer price index (CPI) report from January.
That rise would be less than the 3.2% adjustment for this year and the 8.7% adjustment for 2023—the biggest increase in forty years. Furthermore, it would be less than the 2.5% projection made by the Congressional Budget Office (CBO).
Each month, Mary Johnson, TSCL’s Social Security and Medicare policy analyst, does calculations that differ from those used by the CBO. “But clearly inflation rates are expected to fall from 2023 levels and the COLA for 2025 to be lower as well,” Johnson said.
“My estimates change month to month based on the most recent CPI data,” she said. “We still have eight months of data to come in and a lot could change.”
How Does One Compute COLA?
The Social Security Administration determines its annual Cost of Living Adjustment (COLA) by considering the average annual increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from July to September.
The CPI-W index, which is a comprehensive measure released monthly by the Labor Department, is the primary basis for this calculation. Although the index for urban wage earners is closely aligned with the overall consumer price index, it may exhibit slight variations.
For example, in the previous month, while the overall consumer price index showed a 3.1% increase, the index for urban wage earners saw a 2.9% rise.
How Would Elderly Folks Be Impacted by a Reduced COLA?
Slowing down inflation is appreciated, but a reduced Cost of Living Adjustment (COLA) is not ideal. Seniors are still recovering from the high prices of the past few years, with the December Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) at 3.3%, slightly above the 3.2% COLA increase that older adults received this year.
“That’s not necessarily good news if prices for housing, hospital care, auto insurance, and other costs remain at today’s elevated levels,” Johnson stated last month, assuming COLA declines much in 2025.
Taxes on Social Security are also increasing
A growing number of Social Security beneficiaries are now paying taxes on their income.
People’s incomes increased due to the significant 5.9% COLA hike in 2021, the 8.7% increase in 2023, and the 3.2% increase this year. The amount of income you make determines how much of your Social Security is taxed. A cut may also be taken by some states.
“The growing number of those getting hit by the tax is due to fixed income thresholds,” said Johnson. “Unlike federal income tax brackets, the income thresholds that subject Social Security benefits to taxation have never been adjusted for inflation since the tax became effective in 1984.”
This implies that when retirement income rises, more older taxpayers may eventually be subject to the Social Security benefit tax, and the percentage of taxable benefits may also rise, according to her.
The solo filing status level of $25,000 would be over $75,250 and the joint filer level would be over $96,300 based on inflation through December 2023, she said, if Social Security income criteria had been increased for inflation like federal tax brackets.
