Social Security Cost of Living Adjustment (COLA) Announced for 2025
After three years of above-average COLA adjustments to Social Security, it is no surprise that we are moving back towards our two decades average of about 2.5%. In fact, the Social Security Administration announced a benefit increase of 2.5% for 2025. On average, this will be at least a $48 “raise” per month for recipients in the new year. This back-to-average COLA increase is mainly due to a lower CPI for 2024 than we have seen the past 3 years. If inflation is slowly moving closer to average that means an average COLA increase was in line to follow.
How does this COLA compare to the past? This year may be disappointing to many since we have seen higher raises since 2022. As a reminder, the COLA adjustment was 3.2% in 2024, 8.7% in 2023, and 5.9% in 2022. To give you some perspective, before 2023, the last time we saw a COLA increase above 8% was in 1981! In 1981, inflation was also hitting numbers we hadn’t seen since World War II. Obviously, high inflation is never fun and is often due to unforeseen circumstances. Therefore, as we move further and further past the years following COVID, it is actually a good sign we are getting back to average (even though it may not feel that way).
The bigger questions continue to be around the future solvency of Social Security, and strategies if one is not yet collecting. Here are a few additional thoughts:
If you’re not collecting, it still “pays to wait” because there are still credits (annual increases) to the tune of ~8%, no matter what the COLA is for 2024. One can collect as early as age 62 and as late as age 70, ranging from 70% of your full retirement age benefit to as high as 132% if you wait until age 70. Hence, each year you wait is roughly an 8% increase, regardless of the COLA. The two are different, but often confused for each other.
We are often asked if our country’s debt will mean Social Security will sooner or later fold. Social Security is funded by payroll taxes. So, while solvency continues to be the long-term question, it goes back to the number of workers paying into the system vs. the number of retirees collecting. Solvency is more about demographics than our country’s debt. There are only 2.8 workers for each beneficiary right now. For context it was 8.6 to 1 in 1955, when some of those starting to collect today were born.
The Board of Trustees have been talking about insolvency for years, which some say will be 2034. More pessimistic projections show it could be sooner especially if there are changes to payroll taxes and higher than projected unemployment numbers. The reality is our government will most likely need to make amendments to the full retirement age and taxes with a greater impact on future generations.
Social Security decisions are incredibly important and can often be complicated. If you’re already collecting, the news this week is a good one as you’ll continue to see an increase to your benefits starting in 2025. If you’re not yet collecting, we’d be more than happy to be a resource for you before you make that significant decision.
Sources:
Ticket Number T007931
Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor. Great Valley Advisor Group and Haas Financial Group are separate entities. This is not intended to be used as tax or legal advice. Please consult a tax or legal professional for specific information and advice.
