2025 COLA Projections Change Again – Retirees Reconsider

Arnia
4 Min Read

The Cost of Living Adjustment (COLA) is important for retirees and Social Security beneficiaries because it decides the yearly increase in their benefits. The Senior Citizens League (TSCL) has recently predicted that the COLA for 2025 will be between 2.6% and 3%, which is lower than the 3.2% COLA for 2024. Let’s explore why this lower adjustment could be helpful.

Retirees’ Perspective

A higher-than-average COLA usually means higher inflation. High inflation reduces the value of Social Security benefits, making it harder for retirees to buy what they need. For example, since 2000, the purchasing power of retirees has dropped by almost 36% because of inflation.

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When inflation is low and stable, Social Security’s purchasing power can actually increase. Since 2010, COLAs less than 3% have resulted in a 13% increase in purchasing power. So, a smaller COLA can sometimes be better for retirees.

Tax Implications

The amount of COLA can also affect how much of your Social Security benefits are taxed. A higher COLA can push your income into a higher tax bracket, making more of your benefits taxable. Here’s a quick look at how it works:

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Taxable percentage of benefits:

0%: Individual income less than $25,000, couples less than $32,000

Up to 50%: Individual income $25,000 to $34,000, couples $32,000 to $44,000

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Up to 85%: Individual income more than $34,000, couples more than $44,000

These income limits haven’t changed in over 30 years. As benefits go up, so does taxable income, leading to higher taxes. A lower COLA can help avoid higher taxes, letting retirees keep more of their benefits.

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Projections for 2025

TSCL’s predictions are based on recent Consumer Price Index (CPI) numbers, which showed a 3.3% year-over-year increase. This suggests that inflation may not drop much, leading to a likely COLA below 3% for 2025. Even though this is lower than 2024, it could help maintain the purchasing power of benefits, providing more financial stability for retirees.

Positive Outcomes

A lower COLA might seem disappointing, but it has advantages. Lower inflation means the real value of Social Security benefits is more likely to stay the same or even increase. Retirees can have a better balance between income and living costs without the pressure of high inflation.

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FAQs

What is the predicted COLA for 2025?

The COLA for 2025 is expected to be between 2.6% and 3%.

Why is a lower COLA beneficial for retirees?

A lower COLA can mean lower inflation, which helps maintain or increase the real value of Social Security benefits.

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How does COLA affect Social Security taxes?

A higher COLA can increase taxable income, leading to higher taxes on Social Security benefits.

What are the income limits for taxing Social Security benefits?

Individual income under $25,000 and couples under $32,000 are not taxed. Higher incomes face taxes on up to 85% of benefits.

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How does inflation impact Social Security benefits?

High inflation decreases the purchasing power of benefits, while low inflation can increase it.

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By Arnia
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A Certified Public Accountant specializing in personal finance and taxation. Arnia engaging writing style and deep understanding of tax codes make her articles a must-read for individuals seeking to maximize their tax savings.
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