The US Labor Department will release the long-awaited September inflation data on October 10, 2024. This data is critical in determining the upcoming cost-of-living adjustment (COLA) for Social Security benefits, which will be officially announced by the Social Security Administration shortly thereafter.
With inflation still affecting the economy, many retirees are eager to learn how much their Social Security income will increase in 2025. According to a Gallup survey conducted in 2024, 63% of adults in the United States reported experiencing some level of financial hardship as a result of inflation, up significantly from 45% in 2021.
This increased financial strain makes the upcoming COLA adjustment even more important for millions of Social Security recipients.
The Senior Citizens League (TSCL), a nonprofit organization that advocates for seniors’ issues, predicts that the COLA in 2025 will be around 2.5%, the smallest increase in four years. Despite the modest percentage increase, the actual dollar amount received by retirees will differ depending on the size of their current Social Security benefits.
Retirees with larger benefits will see a higher nominal increase in their payments than those with smaller benefits, but the percentage increase will be consistent across all recipients.
The reality of a 2,5% increase on Social Security benefits
For example, the average Social Security payment for retired workers in September 2024 was $1,920 per month. If the predicted 2.5% COLA is applied, the average benefit would increase by approximately $48 per month, bringing the total to $1,968.
However, those with higher-than-average benefits will see larger dollar increases, whereas those with lower benefits will see smaller increases.
A recent report examines how Social Security benefits vary by age group. Retired workers aged 70 as of June 30, 2024 are expected to receive the largest dollar increase in benefits next year. This is because people in this age group typically receive higher baseline benefits than younger or older retirees.
For example, if a 70-year-old retiree receives an average monthly benefit of $2,068, a 2.5% COLA would result in an extra $51.70 per month, bringing their total monthly benefit to around $2,119. Other age groups, who typically receive smaller benefits, will experience smaller nominal increases.
The way Social Security benefits are calculated explains why retirees over the age of 70 receive the most benefits. First, the Social Security Administration calculates each person’s primary insurance amount (PIA) using a formula based on their earnings from the 35 highest-paid years.
This calculation begins when the individual turns 62, the earliest age at which they can claim retirement benefits. However, the PIA is recalculated on an annual basis as long as the individual works.
Second, the benefit amount is adjusted based on the age at which the individual first claims Social Security. Those who file a claim before reaching full retirement age (which varies by birth year but is typically around 66 or 67) receive a reduced benefit of less than 100% of their PIA.
Delaying benefits beyond the full retirement age, on the other hand, results in a higher payout that exceeds 100% of the PIA. The incentive to delay Social Security payments expires at age 70, making it unwise to wait past this age to claim benefits, as further delays do not increase the benefit amount.
Annual COLAs, which are linked to inflation, affect Social Security benefits regardless of whether the individual has begun receiving payments. Thus, three major factors influence a retiree’s benefit amount: lifetime earnings, the age at which they claim Social Security, and inflation.
Beyond the age of 70, inflation becomes the primary factor influencing benefits, as most retirees no longer have additional income to increase their PIA, and delaying Social Security claims does not increase their payment.