The new increase in social security contributions does not meet the expectations of pensioners

Recipients of social benefits will probably receive a lower Cost of Living Adjustment (COLA) next year. This annual adjustment is determined based on the inflation figures for July, August and September, with the final increase announced in October. While there was an inflation increase of 2.9% in July, the figures for August showed a smaller increase with an annual rate of 2.5%. The specific inflation index used to calculate the COLA by 2.4%, which is expected to impact the final adjustment.

The senior league, a non-partisan group that advocates for senior citizen issues such as Social Security and Medicarecurrently forecasts an increase of 2.5% COLA for 2025. This forecast is confirmed by the Committee for a Responsible Federal Budgeta nonpartisan think tank that studies federal finances also estimates the increase to be around 2.5%. If that forecast turns out to be correct, it would result in an average increase in pension benefits of $48 per month, so that the average monthly payment would be $1,966 starting in January. This marks a return to more moderate increases after a three-year period in which COLA The adjustments increased benefits by 18.8% to take account of a significant increase in inflation.

In recent years, retirees have faced rising costs in key areas such as food, utilities and insurance. Managing these expenses on a fixed income has become increasingly difficult, resulting in many retirees having to dip into their savings sooner than expected. A lower COLA would indicate a cooling of inflation. While this is beneficial for preserving the value of savings and bonds, it does not necessarily mean falling prices. It simply means that the rate of their increase has slowed.

The impact of a low COLA on Americans’ Social Security benefits

The extent to which retirees can keep up with inflation depends largely on how their wealth is distributed and what type of retirement income they rely on. U.S. stocks have performed well enough to beat inflation, delivering an inflation-adjusted annualized return of 9.6% from February 2020 through July 2024. But bonds and pensions have generally failed to keep up. Retirees with different income levels have experienced different impacts. According to Lowell Ricketts, data scientist at the Federal Reserve Bank of St. LouisMiddle-income retirees saw a 4.4% increase in inflation-adjusted income between 2019 and 2022. In contrast, those in the 75th percentile saw an increase of 6.6%, while retirees in the 25th percentile saw a decrease of 1.2%.

Middle and lower income households tend to have a larger share of their savings in bonds and cash rather than stocks, found Laura Quinby, senior economist at the Center for Retirement Research at Boston College. Between February 2020 and July 2024, U.S. bonds lost 4.98% annually in inflation-adjusted terms, and cash holdings lost 2.2%. Middle-income retirees are also more likely to rely on their pension as a source of income compared to higher-income households. Private sector pensions are rarely adjusted for inflation, while public sector pensions can offer adjustments that typically limit increases to around 3%.

A real-life example: Susan and John Gering, both 74 and retired since 2019, have had to make significant changes to their spending habits in the face of rising inflation. The couple, who live in Brentwood, Tennessee, have cut back on their travel, opting for shorter trips to Florida rather than more expensive destinations like Hawaii. They've also reduced their attendance at Atlanta Braves games, which used to be a frequent activity, as travel and lodging costs make these outings much more expensive. Other cost-saving measures include longer car trips and fewer restaurant visits.

Medicare premiums are another factor that increases the value of Social Security COLA. For many, the premium for Part B, which covers doctor visits and outpatient treatments, is automatically deducted from their Social security contributions. In 2025, the Standard premium for Part B is expected to rise from $174.70 to $185 per month. This would be about 20% of the expected monthly increase of $48 by the COLA, the financial relief for pensioners continues to decrease.