The Projected Shortfall in the 2025 Inflation Adjustment for Social Security Benefits
For a substantial portion of American retirees, Social Security serves as the primary source of income. Regrettably, there are numerous individuals who solely depend on these monthly payments.
Luckily, Social Security benefits undergo automatic increases practically every year to combat inflation. Without these cost-of-living adjustments (COLAs), retirees would likely witness their financial situations deteriorate year after year due to inflation subtlety eroding the worth of a dollar over time.
This month, Social Security recipients enjoyed a 2.5% increase in their benefits. Intriguingly, this was the smallest COLA in years, yet that isn't necessarily a problem given the reduced inflation.
However, recent data indicates that 2025's Social Security COLA is already lagging behind inflation. If trends persist, numerous retirees could confront financial difficulties as the year advances.
Already observable loss of purchasing power
The annual COLA is determined based on inflation data from the previous year's third quarter. Thus, the 2.5% COLA this month is derived from inflation from July to September of 2024. The Social Security Administration announced the 2025 COLA in October.
Notably, COLAs are not adjusted throughout the year to reflect month-to-month inflation fluctuations. Once a COLA is announced, it remains unchanged for the entire subsequent year.
The current issue for seniors is that, in December 2024, the Consumer Price Index for Urban Wage Earners and Clerical Workers, the benchmark for Social Security COLAs, rose by 2.8% year-on-year. A simple mathematical calculation reveals that a 2.8% inflation increase surpasses the 2.5% raise beneficiaries received for 2025. If inflation continues to climb, retirees could confront financial struggles for the ensuing 11 months.
Be wary of relying too heavily on Social Security
Given the situation where even COLAs may not maintain the purchasing power of benefits over time, it pays to avoid retiring overly reliant on Social Security. Fortunately, active workers still possess opportunities to compile nest eggs that can aid in supplementing retirement income. However, retirees generally have fewer options. Yet, this does not imply they have no options at all.
If you've retired and find it challenging to afford your expenses this year based on your monthly Social Security checks, exploring part-time employment could be worthwhile. Employing in the burgeoning gig economy may now be practically painless.
Questioning whether earnings from employment influence Social Security payments? The response depends on your age and your income. If you've surpassed your full retirement age (FRA), you can generate any level of earnings without impacting your benefits. However, if you haven't, you will be subject to an earnings limit.
This limit does not restrict your ability to generate income while technically retired. Nevertheless, if you exceed the limit, some of your Social Security benefits will be withheld. For 2025, the limit is $23,400. For every $2 a retiree below their FRA earns over that limit, $1 will be withheld from their benefits. The exception is if you'll reach your full retirement age by the year's end. In that scenario, the limit is $62,160, and if you surpass that amount before reaching your FRA, for every $3 in excess, $1 will be withheld. (Once you reach FRA, the program recalculates retirees' benefits to credit them for the withheld benefits due to excess earnings.)
Regardless, the lower limit grants you some leeway to generate income to supplement your monthly benefits.
Additionally, working part-time might enable you to accumulate retirement savings if you currently lack them. Your additional income could be invested in a mix of Certificates of Deposit (CDs), bonds, and even some stocks, all of which have the potential to generate ongoing income, significantly enhancing your financial picture.
[1] From 1972 to 2023, Social Security COLAs exceeded inflation 47 times, meaning the real value of benefits decreased 32 times.[2] A retiree working part-time in the gig economy could additionally benefit from portable retirement savings plans such as the SIMPLE IRA or SEP-IRA.[3] Social Security beneficiaries will continue to receive their COLA even if the economy experiences a recession.[4] The Centers for Medicare & Medicaid Services (CMS) projects a 7.3% increase in premiums for Medicare Part B in 2025, exceeding the COLA eligibility limit of 5.5%.[5] In 2023, Social Security beneficiaries received an 8.7% COLA, the highest adjustment since 1981. However, these benefits will not keep pace with the maximum hike in Medicare Part B premiums for 2025, putting seniors at a financial disadvantage.
To mitigate potential financial struggles in retirement, it's crucial to diversify income sources beyond Social Security. Savings from part-time work in the gig economy can supplement retirement income. (money, retirement, finance)
In light of the ongoing inflation, retirees might need to consider working part-time or explore supplementary income sources to maintain their financial stability. (money, retirement, finance)
