For most retirees, Social Security does more than just pay out a monthly check. On the contrary, it constitutes a financial basis without which retirees would have difficulty living.

Based on an analysis by the Center on Budget and Policy Priorities (CBPP), the poverty rate for adults ages 65 and older is 10.2 percent with Social Security, in 2022. If this vital program n did not exist, the CBPP estimates that the poverty rate for adults aged 65 and over would be 38.7%!

More than two decades of annual Gallup surveys reiterate the importance of Social Security income for workers who can no longer support themselves. Between 80% and 90% of retirees surveyed rely, to some extent, on their monthly check to cover their expenses, including 88% in the April 2024 survey.

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With Social Security playing such an important role in helping retirees pay their bills, it’s no surprise that the 2025 cost of living adjustment (COLA) revealed on October 10 was a highlight of the year .

But even if the overall COLA amount for 2025 is higher than average, retirees shouldn’t count on their entire increase coming.

Social Security increase for 2025 will be above average for the fourth consecutive year

The “COLA” that Social Security pays to its beneficiaries most years is the program’s mechanism to combat the loss of purchasing power due to inflation. In other words, if the price of goods and services increases collectively, Social Security benefits should, ideally, increase by the same percentage to ensure that seniors do not lose purchasing power.

During the 2010s, Social Security increases were minimal. Only two out of ten years exceeded 2% during the decade, with deflation leading to no COLA transmission in 2010, 2011 and 2016.

But over the past four years, the pocketbook of Social Security recipients has expanded significantly. In 2022, 2023 and 2024, beneficiaries benefited from increases of 5.9%, 8.7% and 3.2% respectively. Notably, the 8.7% increase in 2023 was the largest percentage increase in 41 years, and the largest in nominal dollars since the program’s inception.

In 2025, beneficiaries will receive a 2.5% increase, which is slightly higher than the 2.3% COLA average over the previous 15 years.

While this represents the lowest COLA on a percentage basis since the 1.3% increase in 2021, it will still be welcome after several years of above-average inflation. The average retired worker should see their monthly check increase by $49 to $1,976. Meanwhile, disabled workers and surviving beneficiaries are expected to see their respective average monthly payments each increase by $38 to $1,580 and $1,551.

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Retirees are unlikely to feel the full effects of their 2.5% Social Security increase in 2025

But as the old saying goes, “Don’t count your chickens before they hatch.” While retirees should, on paper, receive a 2.5% COLA in the coming year, there is a extremely it is very likely that they will say goodbye to a significant part of this increase.

For starters, the Medicare Trustees report, released in May, estimates that the Part B premium in 2025 will increase 5.9% to $185 per month. Part B is the segment of Medicare responsible for outpatient services.

For Social Security beneficiaries who are also enrolled in traditional Medicare (Medicare eligibility age is 65), the Part B premium is generally deducted from their monthly Social Security payment. Even if the Social Security COLA increases benefits by 2.5% year over year, the Medicare Trustees report expects monthly Part B premiums to increase by just over 10%. $ per month in 2025. In other words, most retired workers will see some, or potentially all, of their 2025 COLA offset by a significant increase in the Medicare Part B premium.

But this is only part of the challenge awaiting retirees in 2025.

In addition to most older beneficiaries losing all or part of their increase to a higher Part B premium, ever-increasing COLAs continue to expose a higher percentage of retirees to taxation on retirement income. social security over time.

In 1983, with Social Security’s asset reserves nearing exhaustion, Congress passed the Social Security Amendments of 1983, and then-President Ronald Reagan signed them into law. This latest sweeping bipartisan overhaul of America’s main retirement program gradually increased the full retirement age and payroll taxes for workers, and introduced the now-hated taxation of benefits.

Starting in 1984, up to 50% of Social Security income became federally taxable if provisional income (adjusted gross income plus tax-free interest plus 50% of Social Security benefits) exceeded $25,000 for a filer single and $32,000 for a single filer. couple filing jointly. In 1993, the Clinton administration added a second tax tier that exposed up to 85 percent of Social Security income to federal tax if provisional income exceeded $34,000 and $44,000 for singles and couples filing jointly, respectively.

The problem is that these provisional income thresholds have not been adjusted for inflation since their introduction decades ago. As the COLA increases benefits, more retirees are exposed to benefit taxation.

Whether it’s Medicare Part B or federal benefit taxation, most retirees won’t feel the full effect of their 2.5% COLA in 2025.