Sun. Jul 14th, 2024

How it is calculated – and what it means for your pension

By Vaseline May31,2024

According to April 2024 data from the Social Security Administration (SSA), nearly 68 million people receive Social Security benefits. Many of them depend on social security for their financial well-being. For others, it may be their only form of income after retirement.

To help you keep up with rising inflation, the SSA applies a cost-of-living adjustment (better known as COLA) to benefits each year. According to the Senior Citizens League (TSCL), Social Security’s COLA projection for 2025 is currently 2.66%. The estimate shows a downward trend from recent years, raising concerns about financial insecurity among seniors. However, there is still time for the situation to change as the official COLA increases will not be announced until October. Learn more about how Social Security COLA is calculated and its impact on seniors.

The cost of living adjustment aims to level the playing field and increase benefits in line with the increase in inflation. The adjustments are not random. Social Security’s COLA calculation uses data from the Consumer Price Index for Urban Wage Earners and White-collar Workers (CPI-W), released at a specific time by the Bureau of Labor Statistics to inform the increase.

“The SSA COLA is not a mystery, it is based on the CPI-W,” says Brooke Petersen, CFP, ChFC and wealth advisor at investment advisory firm Conrad Siegel. “The COLA is based on the percentage increase in the CPI-W from the third quarter of the previous year to the third quarter of the current year.”

This calculation is legally established and has been done automatically since 1975, thanks to a COLA provision in the Social Security Amendments of 1972. Since 1975, there have been three years in which the calculation resulted in a COLA of 0.0% because there was no increase in the CPI W: 2010, 2011 and 2016.

Social Security’s current COLA projection for 2025 is 2.66%, according to the Senior Citizens League. TSCL updated its 2025 COLA forecast based on April CPI-W data, which came in at 3.4%. TSCL’s projection rose slightly from 2.6% when CPI-W stood at 3.5% in March

But remember, this is just an estimate of potential COLA increases for 2025. The official COLA increase is based on Q3 data from July to September, so it’s too early to comment. “Almost everyone was wrong about the trajectory of inflation this year,” says Petersen.

COLA has seen major differences over the past decade. The lowest COLA during that period was in 2016 at 0.0%, and the highest was in 2023, when the COLA was as high as 8.7%.

The Social Security COLA increase in 2024 was a lower 3.2%.

Source: Social Security Administration

The projected Social Security COLA in 2025 is 2.66%, resulting in another decline. That percentage will likely change, but the concern is that the COLA increase is not enough.

“For 2024, the average Social Security benefit increased by $50.00, and after deducting $9.80 to cover Medicare Part B Premium increases, the total change in benefits came to just $40.20 per month,” it said executive director Shannon Benton in a May 15 TSCL release. . “With the forecast of a 2.66% COLA for 2025, it appears that seniors will continue to suffer as much financial uncertainty next year as they did this year.”

A survey from the National Institute on Retirement Security echoes that sentiment: 87% of respondents are concerned about rising costs, and 66% are concerned about rising healthcare costs in retirement.

If you are currently receiving Social Security benefits, the projected Social Security COLA for 2025 can give you an idea of ​​what kind of increase you could see. But you’ll have to wait for the official figures.

“The COLA that will be applied to beneficiaries’ checks beginning in January 2025 will be calculated and announced in October 2024,” said Martha Shedden, president and co-founder of the National Association of Registered Social Security Analysts.

The increase can help combat inflation and try to preserve purchasing power, but other costs offset the benefit of your Social Security benefits.

“Medicare Part B premiums have the largest impact on the net amount of retirees’ Social Security income, as these premiums are subtracted from Social Security checks,” Shedden says.

The main problem is that the COLA increase doesn’t account for all the extra costs everyone faces, especially seniors who pay for Medicare on limited incomes.

“As we have all experienced, the cost of goods and services is significantly higher,” says Petersen. He explains that the increases for Medicare Part B and Medicare Part D have significantly exceeded Social Security’s COLA, eroding purchasing power.

The Social Security COLA increase in 2024 was a disappointment for many retirees.

As of now, Social Security’s COLA projection for 2025 is a decline compared to the 2024 COLA, which could feel like a bigger blow. But we’ll have to wait until October to find out.

What is the average Social Security check?

According to Social Security Administration data, as of April 2024, the average Social Security check is $1,776.73. Individual benefits vary and may be more or less than the average.

How long has social security existed?

Social Security was signed into law by President Franklin D. Roosevelt in August 1935 with the Social Security Act to provide an income for Americans in retirement. The country started paying taxes into the program from 1937.

That first year, recipients received a one-time benefit. Monthly Social Security benefits began in 1940.

For the 2024 tax year, your annual income limit is $22,230. If you reach full retirement age in 2024, the maximum amount you can earn in the months before retirement is $59,520.

Enter your date of birth and salary into the SSA earnings test calculator to see how your pre-retirement earnings could affect your Social Security benefits.

Melanie Lockert is an LA-born, Brooklyn-based freelance writer with a decade of experience in personal finance. Melanie started the Dear Debt blog in 2013 and chronicled her journey out of $81,000 in student debt. She published a book of the same name in 2016. Her expertise in personal finance has been featured in Fortune Recommends, CNN Underscored, Yahoo Finance, and Business Insider, among others. She is also host of the Mental Health and Wealth Show and co-founder of the Lola Retreat, a financial event for women.

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