2025 Social Security COLA Almost Wiped Out by Medicare Hikes, Leaving Retirees Struggling
Retirees hoping for relief from rising costs with the 2025 Social Security cost-of-living adjustment (COLA) are facing a harsh reality: most of the 2.5% increase will be swallowed by higher Medicare premiums and deductibles.
Next year’s COLA falls far short of the 8.7% adjustment for 2023, which was the largest increase in over 40 years and meant to help seniors and people with disabilities keep up with soaring prices. The official Social Security cost-of-living adjustment (COLA) numbers released on 10th October are a disappointing 2.5%, a sharp drop from the 3.2% increase retirees received in 2024.
This meager adjustment raises concerns about how seniors will cope with persistent inflation
How Much Could The Average Retirement Benefit Increase?
The increase in your benefits due to the COLA depends on your current Social Security benefits. Here’s a breakdown of the average retirement benefits for seniors aged 62, 67, and 70, showing how a 2.5% raise would impact their monthly payments next year:
Age 62:
– Current Average Retirement Benefit: $1,298.26
– Retirement Benefit After 2.63% COLA in 2025: $1,330.72
– Change in Monthly Social Security Benefit: $32.46
Age 67
– Current Average Retirement Benefit: $1,563.06
– Retirement Benefit After 2.63% COLA in 2025: $1,602.14
– Change in Monthly Social Security Benefit: $39.08
Age 70
– Current Average Retirement Benefit: $2,037.54
– Retirement Benefit After 2.63% COLA in 2025: $2,088.48
– Change in Monthly Social Security Benefit: $50.94
Don’t Forget Medicare Increase
The estimates for the benefits increase are not entirely precise because the COLA is not applied directly to your current benefit. Instead, it is calculated based on your primary insurance amount (PIA), which represents the benefit you would have received if you had started claiming at your full retirement age. This updated PIA is then adjusted based on whether you earned delayed retirement credits or incurred penalties for early filing.
If you pay Medicare premiums directly from your Social Security, like most retirees, part of your raise may be offset if premiums go up.
These factors mean your actual benefit increase may vary, even if you currently receive the average Social Security benefit for your age group.
Nonetheless, these estimates offer a reasonable projection of how much money the average retiree may receive once the COLA is applied next year, as long as there is no significant deviation from the expected CPI-W.
2025 Medicare Numbers Released
On November 8, 2024, the Centers for Medicare & Medicaid Services (CMS) announced the 2025 rates for Medicare premiums, deductibles, and coinsurance, including adjustments for Medicare Part A, Part B, and the income-related monthly premiums for Medicare Part D.
For Medicare Part B, which covers services such as physician visits, outpatient care, durable medical equipment, and some home health services, the standard monthly premium will rise to $185.00 in 2025—an increase of $10.30 from the 2024 rate of $174.70. Similarly, the annual deductible for Medicare Part B beneficiaries will increase by $17, going from $240 in 2024 to $257 in 2025.
These increases are attributed to projected price changes and expected higher utilization of services, following historical trends.
With the standard Medicare Part B premium jumping by $10.30, many seniors will see little to no real benefit from the COLA. As inflation continues to pressure household budgets, the financial squeeze on retirees is only tightening.
Calculation of COLA Estimates
The Social Security Administration determines its COLA annually based on the average yearly increases in the consumer price index for urban wage earners and clerical workers from July through September.
This index closely mirrors the overall index released monthly by the Labor Department, with minor variations.
The COLA is calculated by comparing the percentage change in average prices between the third quarter of the current year and the third quarter of the previous year.
Important Dates for COLA Changes
The official COLA announcement was made on Oct 10th.
Individual notifications will go out informing recipients of their new benefit amount in December.
The first checks with the increased benefits will be mailed in January.
Usage of CPI-W Metric For COLA Calculation
CPI-W stands for Consumer Price Index for Urban Wage Earners and Clerical Workers. COLA is based on CPI-W.
While the full-year CPI-W rose by 3.8% last year, the third-quarter CPI-W only climbed by 3.2%. As a result, Social Security benefits lagged behind inflation and saw a loss in purchasing power. This trend will persist if CPI-W inflation exceeds 3.2%.
Decrease In COLA Compared To Prior Years
The latest estimate is grounded in the March 2024 CPI-W, which stood at 3.5%, per the Bureau of Labor Statistics.
Last year’s Social Security COLA was 8.7%, while this year’s adjustment is 3.2%. The 2024 COLA adjustments as a result of 3.2% increase in their Social Security payments boosted the average retiree benefit by $59 per month.
As retirees grapple with inflation, the forecasted 2.5% COLA for 2025 represents a potential setback.
Is CPI-W The Right Metric For Retirees?
Many experts argue that the CPI-W—which tracks everyday spending on items like food, housing, and consumer goods for workers—doesn’t accurately capture inflation’s impact on retirees. They suggest that Social Security COLAs should be based on the Consumer Price Index for Americans aged 62 and older (CPI-E), as this index more precisely reflects the costs faced by older adults.
How Would CPI-E Change COLA Calculations?
Some economists, however, contend that the CPI-E may not always be the best measure for older Americans and might not necessarily lead to a higher COLA.
Nonetheless, if this proposed change to Social Security proves to be a more accurate reflection of the costs seniors face, the 2025 COLA forecast of just 2.5% becomes even more concerning. Throughout this year, the CPI-E has risen faster than the CPI-W each month.
In the first quarter of 2024, the CPI-E rose by 3.6%, while the CPI-W went up by just 3.2%. Last year, the full-year CPI-E climbed 4.6%. As CPI-E inflation continues to exceed CPI-W inflation, Social Security benefits may lose even more purchasing power in the coming year.
Rising Costs Hit Seniors Hardest As Shelter, Hospital Services, and More Surge
Once again, the expenses seniors spend the most on have seen some of the steepest increases.
Shelter costs climbed 5.7% year-over-year, while hospital services saw a 7.5% spike, the highest increase since October 2010, according to Bureau of Labor Statistics data.
Transportation services soared by 10.7%, and electricity prices rose 5.0%.
COLA is designed to assist Social Security recipients in keeping up with inflation and maintaining their standard of living, but in practice, it hasn’t been effective.
Poverty among Americans aged 65 and older has risen to 14.1% in 2022 from 10.7% in 2021, marking the largest increase among all age groups, according to recent data from the U.S. Census Bureau.
Daily Necessities Rising Faster Than COLA
The Senior Citizens League 2024 Senior Survey indicates
– 43% retirees experienced a rise in household expenses exceeding $185 per month in 2023.
– 71% reported household costs increasing by more than 3.2% in 2023, the percentage used to set the COLA.
– 53% have used up their emergency savings.
– 61% reported food as their most significantly increased expense.
Taxes Take a Bite From Social Security Checks
As retirees file their taxes this year, many seniors are likely realizing they owe taxes on their Social Security benefits.
The 5.9% COLA increase in 2021, the 8.7% bump in 2023, and the 3.2% rise this year have all raised retirees’ incomes. The amount of Social Security subject to taxation depends on total income, and some states may also tax these benefits.
Since income thresholds for taxing Social Security benefits have never been adjusted for inflation since the tax was introduced in 1984, more older taxpayers have become liable for the tax over time.
Additionally, as retirement income grows, the portion of benefits subject to taxation can also increase.
Retirees Found 2024 COLA Increases Low
A survey by Atticus reveled financial distress due to the smaller than expected 2024 COLA increase.
– 62% of surveyed seniors are unhappy with the 3.2% COLA for 2024, with nearly identical dissatisfaction levels among men (63%) and women (62%).
– Almost 60% of seniors are already facing financial hardship with their current Social Security benefits.
– 70% of single seniors are struggling financially with their current Social Security income.
– Nearly 40% of seniors intend to find work due to the modest COLA increase, with 47% of single seniors considering employment to boost their income.
– Men are 23% more likely than women to pursue full-time employment in response to the COLA increase.
More than 20% retirees have gone back to work.
Minimum COLA Proposed by The Senior Citizens League
Shannon Benton, executive director of The Senior Citizens League (TSCL), said in a statement, “This year represents another lost opportunity to grant seniors the financial relief they deserve by changing the COLA calculation from the CPI-W to the CPI-E, which would better reflect seniors’ changing expenses. Seniors and TSCL demand that Congress takes immediate action to strengthen COLAs to ensure Americans can retire with dignity, such as instituting a minimum COLA of 3 percent and changing the COLA calculation from the CPI-W to the CPI-E.
The COLA announcement came less than a month before the presidential election, with the economy and the high cost of living weighing heavily on voters’ minds.
“The annual COLA is vital for Social Security beneficiaries to make ends meet, but 2.5% is not nearly enough for seniors living on fixed incomes,” Congressman John Larson (Connecticut) wrote on X, formerly known as Twitter.
Social Security and Medicare Solvency
COLA not keeping pace with expenses is part of a larger issue where the solvency of Social Security and Medicare is projected only till 2035 and 2036.
If no changes are made to the programs before these dates, benefits will need to be cut as per the Social Security Administration Trustees’ Report.
While the 2025 COLA may offer a slight increase in benefits, it’s prudent not to depend too heavily on Social Security if alternatives are available. If benefits continue to erode in purchasing power, your checks may not stretch as far in future years, despite yearly adjustments.
Not everyone has the option of multiple income streams. For those relying solely on benefits, the COLA remains a crucial annual support. However, if you’re able to save additional funds or secure an extra income source, you might find it more manageable to lessen your reliance on Social Security.
How Can You Supplement Your Social Security?
Americans have few choices in their golden years. They can either sacrifice their quality of retirement life or continue to work longer. Younger Americans must start saving and investing aggressively, assuming the current dire projections worsen as they retire.
While financial experts suggest setting aside 10% to 15% of your yearly income, initiating your savings journey with a modest amount and progressively increasing it is a viable approach, particularly if you carry outstanding debts from credit cards, healthcare expenses, or student loans. Use a free tool like Personal Capital from Empower to automatically create a budget based on your current spending.
Prioritizing your employer-matched 401(k) contributions is crucial, as it essentially translates to free money. Many employers extend matching contributions, typically ranging from 2% to 4% of an employee’s annual salary which can be invested in stocks.
Once you’ve maximized your 401(k) employer match, exploring additional avenues like an individual retirement account (IRA) becomes a consideration. An IRA, separate from your employer, offers options such as the traditional retirement account and Roth IRA, both popular choices for long-term savings.
Besides stocks, one can also invest in real estate. If you do not want to be a landlord dealing with tenants and toilets, crowdfunded real estate platforms offer options to invest with General Partners managing the deals.
Looking Ahead and Preparing for the 2025 Social Security COLA and Beyond
It is clear that even with the projected increase to 2.5% for 2025, seniors may continue to face financial hardships due to inflation rates that outpace COLA adjustments. This underscores the importance of either having a diversified approach to retirement planning or advocating for policy reforms that better address the economic realities of aging populations.
For those who can, diversifying income sources and saving strategically remains crucial. Initiatives like increasing savings rates, investing in retirement accounts, and exploring other investment opportunities should be considered sooner rather than later. These steps are vital not only for current retirees but also for younger generations who may face similar, if not more severe, challenges upon reaching retirement age.
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John Dealbreuin came from a third world country to the US with only $1,000 not knowing anyone; guided by an immigrant dream. In 12 years, he achieved his retirement number.
He started Financial Freedom Countdown to help everyone think differently about their financial challenges and live their best lives. John resides in the San Francisco Bay Area enjoying nature trails and weight training.
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Personal Capital: This is a free tool John uses to track his net worth on a regular basis and as a retirement planner. It also alerts him wrt hidden fees and has a budget tracker included.
Platforms like Yieldstreet provide investment options in art, legal, real estate, structured notes, venture capital, etc. They also have fixed-income portfolios spread across multiple asset classes with a single investment with low minimums of $10,000.
