The Social Security Administration has announced that the cost-of-living adjustment (COLA) for 2025 is likely to be lower than the previous year. Experts predict that continued price pressures will result in another COLA increase, but it is expected to be less than the significant 8.7% increase seen in 2023. The COLA helps Social Security benefits keep up with inflation, ensuring that seniors can still afford to live as prices rise.
Even a small percentage increase in monthly income can provide more financial security for retirees, particularly those living in poverty. However, the COLA is not perfect and doesn’t account for individual spending patterns. Social Security currently has enough funds to make payments, but there are concerns about its long-term viability.
The ratio of workers to beneficiaries has been steadily declining, putting additional strain on the program. The SSA estimates that without modifications, the program will only be able to pay out 75% of scheduled payments by 2035. In 2025, debates about Social Security reforms are likely to take center stage due to solvency issues.
Experts forecast smaller COLA increases
Possible reforms include raising the payroll tax cap, gradually raising the retirement age, and changing the benefit formula for wealthier users. Seniors may be disappointed by the increase in their benefits in 2025.
Forecasts suggest that the 2025 COLA will be 2.6%, down from 3.2% in 2024. Despite the lower forecast, the 2025 COLA will still be larger than the average COLA before the pandemic. Health care costs have risen faster than the general rate of inflation and account for a disproportionate percentage of retirees’ overall costs.
Medicare’s board of trustees predicted that standard Medicare Part B premiums will increase by about 5.8% in 2025, to $185 a month from $174.80 a month in 2024. One effective way to prepare for health care costs in retirement is to contribute to a health savings account (HSA). Contributions to an HSA are pretax or tax-deductible, the money grows tax-deferred, and you can withdraw it tax-free for eligible medical expenses at any time in the future.
Seniors and their financial advisors should keep a close watch on these developments to plan their retirement finances accordingly. The final details of the 2024 adjustment will be clearer once the official calculation is complete later in the year.
