A policy group predicted that the cost-of-living adjustment (COLA) for next year’s Social Security payments may be far lower than the past several years—due to inflation.
When inflation goes up, the Social Security Administration uses it to determine the COLA for the forthcoming year. Some economists have predicted the main inflation metric, the consumer price index for urban wage earners, may go down this year due to the recent interest rate hikes issued by the Federal Reserve.
“This is the forecast based on data through January 2024 that was released today, and the final COLA for 2025 is likely to be different from the estimates because the COLA is calculated on the average rate of inflation during the 3rd quarter which is compared against the 3rd quarter a year ago,” it said in a Feb. 13 news release. “In other words, there are another eight months of data to come in, and a lot could change.”
Even though the rate for 2025’s payments haven’t been confirmed, Mary Johnson the Senior Citizen League’s analyst, suggested that “clearly inflation rates are expected to fall from 2023 levels and the COLA for 2025 to be lower as well.”
If the adjustment to Social Security checks drops next year, Ms. Johnson added that it’s “not necessarily good news if prices for housing, hospital care, auto insurance, and other costs remain at today’s elevated levels.”
At the same time, more Social Security recipients will be taxed starting this year on their benefits.
“The growing number of those getting hit by the tax is due to fixed-income thresholds,” Ms. Johnson said, reported USA Today. “Unlike federal income tax brackets, the income thresholds that subject Social Security benefits to taxation have never been adjusted for inflation since the tax became effective in 1984.”
For this year, more than 71 million Social Security recipients got a 3.2 percent increase, marking the third straight year that an increase has taken place because of relatively high inflation. The previous year saw an 8.7 percent increase, while the year before that saw a 5.7 percent bump.
Federal Reserve Bank of San Francisco President Mary Daly told Reuters on Friday, “there is more work to do” to ensure stable prices after a number of analysts said the 3.1 percent inflation was hotter than anticipated. “We will need to resist the temptation to act quickly when patience is needed and be prepared to respond agilely as the economy evolves,” she added.
Inflation declined rapidly last year, from 5.5 percent in January to 2.6 percent in December by the Fed’s targeted measure of the personal consumption expenditures price index. Unemployment, meanwhile, was 3.7 percent last month, up just three tenths of a percentage point from the start of the year.
Since March 2022, the Fed has raised its policy rate by 525 basis points to the current 5.25 percent to 5.50 percent range.
