The 2025 Social Security cost-of-living adjustment (COLA) forecast has been revised downwards, and it may pleasantly surprise many retirees.

Social Security is a vital lifeline for many retirees. According to information collected through the Social Security Administration, households aged approximately 65 years and above receive not less than 50% of their source of revenue from this system. Without Social Security, millions of senior citizens would be living in poverty.

Since many seniors depend on Social Security for their living expenses, the annual cost-of-living adjustment (COLA) accounts for a significant portion of their benefits. Beneficiaries receive an increase in their per month assessment based on how much costs increased from the previous quarter to the third quarter. We haven’t reached the third quarter of 2024, but analysts are making their precise assumptions about what the COLA could be.

After studying the latest Consumer Price Index (CPI) from May, the Senior Electorate League updated its forecast. It is now expected that senior citizens will get a 2.57% increase in their Social Security assessments in the nearest past.

This is weaker than its previous approach of 2.66% and well below the 3.20% COLA seniors have won so far. However the COLA reduction could work a nice miracle for retirees.

The most important problem for social security

The COLA next above average indicates higher than average inflation. And inflation has been extremely destructive to the value of Social Security.

This has already eroded the purchasing power of the gains. The average retiree who began receiving benefits in 2000 has seen his housing stock increase at a much faster rate than his monthly valuation. The Senior Electorate League estimates that they have lost about 36% of their purchasing energy. This was further increased due to the high inflation of the last few years.

The way Social Security administration calculates the annual COLA is always backward-looking. Since it is not possible to know with certainty what inflation will be like in the future, the SSA will only increase bills based on how housing bills have risen previously. This means senior citizens should see their benefit estimates increase in higher inflation categories.

On the other hand, low and solid inflation is excellent for Social Security recipients. Social Security’s purchasing power has grown at about the same pace since 2010 had the COLA not been up to 3%. Purchasing power grew at a cumulative rate of 13% over the years when COLA was less than 2% during that length.

Seniors have to be happy with the slow and safe build-up of their annual benefits.

Don’t make mistakes regarding tax invoices

Another reason why top COLAs can be devastating to retirees’ net worth is the taxation on Social Security benefits. Social Security’s source of revenue is taxed according to a metric known as mixed source of revenue.

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The blended source of revenue is the same as your Social Security benefits plus your adjusted imputed revenue source and any nontaxable interest sources of revenue. As your Social Security benefits grow, your combined source of income will also grow, and your additional benefits will likely become taxable.

Refer to the desk presentations to determine how much of your Social Security benefits may be relied upon as a taxable source of revenue, depending on your mixed sources of revenue and filing status.

Taxable portion of profitCombined source of revenue (individual filer)Combined source of revenue (joint filer)0p.cNot up to $25,000Under $32,000Up to 50%$25,000 to $34,000$32,000 to $44,000$85p.cOver $34,000 Over $44,000

Knowledge Supply: Social Security Management.

Those boundaries may be less visible. In fact, they have not been updated in more than 30 years and there is no scope for inflation adjustment in the law. So while the calculation of age benefit moves forward, the taxable limits remain the same. The result is that more and more senior citizens are facing larger tax expenses every day.

A lower COLA can help you book your additional Social Security benefits instead of paying taxes.

This location will be on 2025 COLA land

The CPI numbers for May came in several times better than expected, forcing the Senior Electorate League to lower its forecast. However there is still momentum ahead before the end of the third quarter. Alternative experts are not so convinced that we have completely got inflation under control.

Probably the crowd with the biggest interest in where inflation is going is the Federal Clear Markets Committee, or FOMC. The committee is in charge of setting interest rate insurance policies to support the Fed’s overall business and sound inflationary work. The Fed’s stream function is to bring inflation back to two%.

At the latest FOMC meeting, Fed Chairman Jerome Powell hinted that the Fed could reduce the interest-rate scale by one step before the end of the past year. The rate cut signals increased confidence that inflation is falling toward 2%, allowing the Fed to ease cash supply. The committee had earlier indicated that there could be three rate cuts by now, so the current trend suggests that is no longer the case as fixed rates are deteriorating.

The Age CPI study for May was excellent, with inflation still higher than the previous 3.3%. The Senior Electorate League’s forecast suggests almost no adjustment in pricing from May to the end of September. The age at which this could be imagined seems unlikely.

However, there is a very good chance that the 2025 COLA will come in at less than 3%. Age that is sick of extremes past, retirees will nevertheless be pleased with the results. This means that they are more likely to see an increase in basic purchasing power in their Social Security assessment.

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The 2025 Social Security cost-of-living adjustment (COLA) forecast has been revised upward, and it may pleasantly surprise many retirees The article was first published by The Motley Fool.