The COLA (Cost-of-Living Adjustment) is a number that retirees look forward to every year. This is an increase based on the projected inflation of the last year that increases the amounts to be paid on retirement and other benefits. The rule used is called the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which measures inflation in a basket of goods and services commonly used by salaried urban workers.
To get to the COLA, the authorities compare the average of the CPI-W in the first quarter of the current year with the same average of the third quarter of the previous year. If the CPI-W indicates that there is an increase in prices, an equivalent increase is applied to Social Security benefits, and to other systems such as SNAP benefits. If the CPI-W does not increase or decrease, there is no adjustment in benefits.
A New COLA 2025 Estimate: Will Your Social Security Benefits Increase?
According to the most recent forecast, by 2025 the inflation rate will be 3%, a number higher than other recently published previous estimates. At the beginning of this year, analysts had said that the COLA was going to be between 1.75% and 2.4% in January and February, respectively.
The most recent CPI-W has been calculated at 3.5%, a strong uptick that has taken analysts and the US citizenry in general by surprise. The government is likely to increase welfare benefit checks to reflect inflation and prevent these people from losing purchasing power.
The problem is that some analysts have warned that this increase will not be enough for retirees: older people are already struggling to cover basic needs such as medical care, food and housing, and have little room for maneuver to save or enjoy some extraordinary luxury such as travel or the acquisition of goods.
Is the COLA Increase Enough for Retirees?
Older people face strong inflationary pressure in key areas such as housing, healthcare and transportation. According to data from the Bureau of Labor Statistics, housing costs rose 5.7% annually, while hospital services soared 7.5%. In addition, transportation costs experienced an extreme increase of 10.7%.
In the year 2024, elderly Social Security recipients experienced a 3.2% increase in their payments due to inflation, which meant an increase of approximately $50 to $60 per month. However, this increase was considerably lower than the one recorded in 2023, which was 8.7%.
Despite these increases in Social Security payments over the years, the poverty rate among people aged 65 and over has been increasing. According to estimates from the U.S. Census Bureau. USA., the poverty rate in this demographic was 14.1% in 2022, up from 10.7% in 2021.
The Problem with Taxes After the COLA Increase
Social Security payments increase due to the COLA, the income of the beneficiaries also increases. This may result in some beneficiaries being in an income bracket that puts them in a higher tax bracket, meaning they would pay more taxes on their income, including Social Security income.
In addition, some Social Security income may be subject to federal taxes, depending on the beneficiary’s total income level and whether they have other sources of income. If the COLA increase pushes a person’s income above certain thresholds, they may have to pay additional taxes on their Social Security benefits.
