The Bureau of Labour Statistics has finally made it official - the new cost of living adjustment (COLA) is here to assist millions of Social Security beneficiaries in keeping up with inflation. However, it's important to note that this year's COLA increase is 0.9% lower than last year's, which has sparked significant concerns among beneficiaries, particularly retired workers who depend on these benefits to cover their retirement costs. Despite this, a lower COLA doesn't necessarily imply something negative, as it indicates a decrease in overall inflation, which is beneficial for the economy.
Understanding the Impact of Social Security's COLA Increase
Starting in 2025, over 72 million Americans will witness a 2.5 percent rise in their monthly Social Security and Supplemental Security Income payments due to a cost-of-living adjustment. According to the Social Security Administration, this increase will commence in January and affect 68 million Social Security beneficiaries. For 7.5 million recipients of Supplemental Security Income, the 2.5 percent increase will begin earlier and take effect in December.Officials have also announced that the maximum amount of earnings subject to Social Security tax will be raised to $176,100. Beneficiaries will receive a note explaining the changes to their monthly allotments in December, which will be delivered to their My Social Security account page's message center and made available online. Emails will be used to notify them of any monthly changes.Starting in 2025, beneficiaries will receive more streamlined reports from the Social Security Administration, including specific information such as the exact monthly payment amounts and the expected date of money disbursement. The Social Security Administration states that most recipients will receive an additional $50 per month as a result of the 2.5% increase in cost-of-living adjustments. However, it's important to note that this monthly increase is the lowest since 2021 for both SSI and Social Security recipients.How Inflation Affects Monthly Social Security Payments
As the Social Security Administration explains, the little increase in monthly payments is a direct result of inflation. The cost-of-living adjustment transferred to beneficiaries has decreased in line with the slowdown in inflation. Additionally, in each of the last three years, the COLA increase has declined, as stated in the CNBC article. In 2022, the increase was 5.9%, and this year, beneficiaries experienced a 3.2% increase.Tax Implications of the COLA Increase for Beneficiaries
The Social Security Administration clarifies that Social Security benefits are taxed based on a combined income. Approximately 40% of Americans receiving monthly benefits are required to pay federal taxes on their benefits. For those who must pay taxes on their benefits, in addition to their monthly government checks, they typically have a significant income. The IRS notes that if a recipient's annual total income is between $25,000 and $34,000 and they file as individuals, they will pay taxes on up to 50% of their monthly Social Security and SSI payments. If their combined yearly income exceeds $34,000, they should expect to pay taxes on roughly 85% of their monthly payment.For individuals filing a joint return, if their combined income is between $32,000 and $44,000, they will pay taxes on up to 50% of their monthly benefit, and if their combined income exceeds $44,000, they will pay taxes on 85% of their monthly checks. Recipients have the option to have withholdings taken out of their monthly checks for their federal tax return, as informed by Jim Blair, Vice President of Premier Social Security Consulting. He also mentioned that the amount withheld may need to be adjusted in light of the upcoming 2025 increases.READ MORE