Social Security’s Cost of Living Adjustment (COLA) in 2025 May Not Increase Your Monthly Benefits as Much as You Think

Seniors receiving Social Security benefits get a boost almost every year to help their checks keep up with the rising cost of living. The government still has a few weeks left to finalize the numbers to calculate next year’s cost-of-living adjustment, or COLA. If all goes as expected, Social Security recipients should see a 2.5% boost to their benefits starting in January.

That number could be disappointing after 2023’s 8.7% COLA and this year’s 3.2% adjustment. Plus, many seniors may not even see a 2.5% increase in their monthly checks. Here’s why.

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Medicare costs are rising faster than inflation

The Social Security Administration (SSA) automatically deducts Medicare Part B premiums from beneficiaries’ checks if they are enrolled in the government health insurance program. You become eligible for Medicare at age 65, and the SSA automatically enrolls you in Part A and Part B if you were already receiving retirement or disability benefits.

The cost of Medicare premiums is rising every year to cover the cost of health care for American seniors. The Medicare Board of Trustees has estimated that the monthly Part B premium for most households will increase from $174.70 to $185.00. That’s a 5.9% cost increase, significantly more than the estimated 2.5% COLA.

In other words, the average Social Security beneficiary currently receives $1,872 per month in retirement benefits. A 2.5% increase in that average is $46.80 per month, but about $10.30 of that will go to pay higher Medicare premiums. As a result, the average beneficiary will only see about a 2.2% increase in their current checks.

Don’t forget about taxes

The Social Security Administration will withhold taxes from your monthly paychecks only if you ask for them to, and only at predetermined percentages ranging from 7% to 22%. But whether the SSA withholds taxes from your monthly paychecks or not, next year’s COLA will likely come with an additional tax burden for many retirees.

The way the federal government taxes Social Security is based on a measure called combined income, which equals half of your Social Security benefits, plus your adjusted gross income and any untaxed interest income. If your combined income exceeds certain thresholds, part of your Social Security benefits is considered taxable income, which is subject to federal income taxes.

Here are the thresholds:

Data source: Social Security Administration.

As you can see, these thresholds are incredibly low. What’s more, the SSA doesn’t adjust them for inflation. As a result, more and more seniors are seeing more of their benefits become taxable each year.

When considering the impact of a COLA on your net income, consider your marginal tax rate on your COLA. If 85% of your COLA is taxable in a 12% or 22% tax bracket, that means a 10% or 19% decrease in the actual value of the COLA to your budget, respectively. In addition, you may be subject to state income tax on your Social Security benefits if you live in one of nine states.

Social Security COLA coverage

Understanding how these factors affect your monthly Social Security benefit is half the battle in getting the most out of your COLA. While there’s not much you can do to prevent the rising costs of health insurance and healthcare, the Social Security program does have some built-in safeguards.

The hold-harmless provision ensures that your Medicare premium will not increase by more than your Social Security benefit. That said, it can eat up the entire amount of the benefit increase.

When it comes to taxes, understanding the factors that affect your combined income is the first step. Effectively combating Social Security taxation requires planning ahead and paying taxes up front to avoid higher taxes later. The most commonly used tool is a Roth conversion, which lets you pay taxes now to make tax-free withdrawals later. You can also strategically take capital losses to offset capital gains and keep your adjusted gross income low while still living off your investments.

For many seniors, however, the reality is that next year’s COLA will not deliver the expected increase in purchasing power as the numbers might suggest.

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