2025 Social Security COLA Prediction Keeps Falling
Based on the latest inflation figures announced this morning by the U.S. Bureau of Labor Statistics, retired and now independent Social Security and Medicare policy analyst Mary Johnson has slightly lowered her forecast for the 2025 Social Security cost of living adjustment (COLA).
Next COLA Update: 2025 Social Security COLA Falls Once Again
Previous COLA Update: Updated 2025 Social Security COLA Forecasts Point Toward Lower Raise
All COLA Updates: Social Security Cost of Living Adjustment (COLA)
Johnson this morning put her prediction at a 2.6% COLA for 2025, which is down from 2.7% last month, 3% in June and 3.2% in May. She is long known as one of the foremost experts in tracking potential COLA increases.
The prospective 2.6% COLA for next year would be considered the average amount that COLAs have been over the past two decades and the lowest since 2021, Johnson noted in her brief. Inflation as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W); the index used to calculate the COLA, is 2.9% higher than a year ago, and the index increased 0.1% for the month prior to seasonal adjustment.
The inflation numbers for July are especially important because the COLA is determined on the average rate of inflation in the third quarter (July, August, September) versus the average third quarter inflation a year ago.
As of Aug. 14, we are now 57 days away from the official 2025 Social Security COLA announcement, which will be revealed on Oct. 10, 2024. Today—Aug. 14, 2024—also marks the 89th anniversary of the Social Security Act of 1935, signed into law by then President Franklin Delano Roosevelt.
Nonprofit senior citizens advocacy group The Seniors Citizens League also released an update to its 2025 Social Security COLA forecast. “The 2025 COLA prediction is about 2.57%, down from 2.63% last month,” says Alex Moore, The Senior Citizens League’s (TSCL) statistician and managing partner at Blacksmith Professional Services.
TSCL’s forecast, which uses a different methodology than Johnson, has hovered only slightly since April, staying in a narrow 2.57% to 2.63% range.
• EDITOR’S NOTE: This article has been updated to include the latest forecast released this morning by The Senior Citizens League.
Johnson cautions against eliminating tax
Former President Donald Trump’s recent suggestion to eliminate the taxation of Social Security benefits is likely to be popular with many older voters, but Johnson noted it could have the unintended consequence of causing Social Security to go insolvent two years sooner than currently forecast—by 2033.
Under current law, the revenues from the taxation of Social Security benefits are earmarked for funding Social Security and Medicare benefits. Over the next 10 years Social Security Trustees estimate that the Social Security Trust Funds (retirement and disability) would receive about $939 billion in revenues paid by Social Security recipients and representing roughly 5% of total program funding from 2024 through 2033.
“Unless those revenues were replaced with other revenues, Social Security would become insolvent sooner than currently forecast,” Johnson said, adding that insolvency would cause all Social Security benefits to be reduced by more than 20% as benefits would be adjusted to the amount of revenues received by the program. “Vague political promises not to touch Social Security benefits are meaningless. Voters need to be shown where the money is coming from to pay our benefits.”
She stressed that fixing Social Security’s cash crunch without benefit cuts, while making the Social Security benefit taxation fairer and more reasonable for all is possible. “It can be done in such a way that’s fair for more working adults, while providing enough revenues to significantly reduce the taxation of Social Security benefits for most older and disabled taxpayers,” Johnson said.
She said that applying the Social Security payroll tax to all wages earned by workers would be enough to provide up to 75 years of solvency according to Social Security estimates. Wage earners who make more than the taxable maximum amount (currently $168,600) don’t pay Social Security taxes on earnings over the wage cap. In addition, Johnson said such a change can be structured to provide credit toward benefits for higher earners.
Johnson also pointed to the fact that while income tax brackets and the standard deduction are adjusted annually to keep up with inflation, Social Security income is treated very differently under the tax code.
“The income thresholds that subject Social Security benefits to taxation have never been adjusted since benefits first became taxable in 1984. In 1984 less than 10% of Social Security recipients were affected by the taxation of benefits. Today, more than half of Social Security households pay tax on a portion of their benefits,” Jonnson said.
Under current law when combined income is more than $25,000 (single filers) or $32,000 (couples filing jointly) up to 85% of benefits can be taxable. If those income thresholds were adjusted to today’s dollars, Johnson said the $25,000 level would be about $77,079 and the $32,000 level about $98,660.
“Adjusting the income thresholds to today’s dollars and then annually thereafter would provide greater tax fairness while allowing Social Security recipients to keep more of their benefits,” she said.
SEE ALSO:
• Report Estimates $1.1 Billion in Improper Social Security Payments
• Action Needed Now on Social Security Reform: GAO
• Where the Candidates Stand on Social Security
• Trump Calls for Elimination of Social Security Tax
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
