Older adults should expect a much smaller cost-of-living raise next year as inflation trends continue to slow.
Based on January's consumer price index report on Tuesday, Social Security's cost-of-living-adjustment (COLA) in 2025 is forecast at 1.75%, according to analysis by The Senior Citizens League, a nonpartisan, nonprofit seniors advocacy group.
The budget office uses a different calculation than the senior citizens league, "but clearly inflation rates are expected to fall from 2023 levels and the COLA for 2025 to be lower as well," said Mary Johnson, the league's Social Security and Medicare policy analyst who does these calculations each month.
"My estimates change month to month based on the most recent CPI data," she said. "We still have eight months of data to come in and a lot could change."
How is COLA calculated?
The Social Security Administration bases its COLA each year on average annual increases in the consumer price index for urban wage earners and clerical workers from July through September.
The index for urban wage earners largely reflects the broad index the Labor Department releases each month, although it differs slightly. Last month, while the overall consumer price index rose 3.1%, the index for urban wage earners increased 2.9%.
How would a lower COLA affect older adults?
Though slowing inflation is always welcomed, a lower COLA isn't. Seniors are still catching up from the soaring prices of the past few years, Johnson said. In December, the urban wage earners index was 3.3%, slightly higher than the 3.2% COLA raise older adults received this year.
If COLA drops dramatically in 2025, "that’s not necessarily good news if prices for housing, hospital care, auto insurance and other costs remain at today’s elevated levels,” Johnson said last month.
Social Security taxation is also on the rise
More Social Security recipients are paying taxes on their benefits, too.
The 5.9% COLA increase in 2021, the 8.7% bump in 2023 and the 3.2% rise this year increased people's incomes. How much of your Social Security is taxed depends on how much income you have. Some states may also take a cut.
"The growing number of those getting hit by the tax is due to fixed-income thresholds," Johnson said. "Unlike federal income tax brackets, the income thresholds that subject Social Security benefits to taxation have never been adjusted for inflation since the tax became effective in 1984."
That means more older taxpayers become liable for the tax on Social Security benefits over time, and the portion of taxable benefits can increase as retirement income grows, she said.
If income thresholds for Social Security had been adjusted for inflation like federal tax brackets, the individual filing status level of $25,000 would be over $75,250, and the joint filer level would be more than $96,300 based on inflation through December 2023, she estimated.
Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at firstname.lastname@example.org and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday.
This article originally appeared on USA TODAY: Inflation likely to affect lower Social Security 2025 COLA increase.