Retirees across the United States now know how big of a raise they’ll receive next year. The Social Security Administration (SSA) announced last week that the 2025 Social Security cost-of-living adjustment (COLA) will be 2.5%.

The average monthly Social Security retirement benefit will increase by around $50. Don’t count on receiving that much extra money, though. Most retirees will probably see a smaller increase in their monthly benefits.

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Your Social Security COLA of 2.5% is coming

Is Social Security somehow scheming to give many retirees a smaller COLA than announced? Not at all. Your Social Security COLA of 2.5% is indeed coming in January 2025.

You will even be able to go online beginning in early December to see exactly how much additional money you’ll receive from Social Security next year. You must first have a “my Social Security” account. If you don’t, it’s easy to set one up on SSA’s website. The only catch is that this account must be in place by Nov. 20, 2024, to be able to see your COLA notice online.

What if you don’t set up a “my Social Security” account in time? No problem. SSA will also begin mailing notices in early December to Social Security beneficiaries that explain their new benefit amount. These notices will be one-page documents that use easy-to-understand language. They’ll tell you exactly what your new monthly benefits will be.

Medicare Part B premium increases are likely coming, too

Importantly, SSA’s COLA notice — whether you see it online or in your mail — will also include the amounts of any deductions to your Social Security benefits you’ll have in 2025. And those deductions are the reason why most retirees’ monthly benefit increases will be less than 2.5% next year.

According to the Centers for Medicare and Medicaid Services (CMS), most people have their Medicare Part B premiums deducted automatically from their Social Security benefits. This makes sense because it eliminates the need to remember to pay your Medicare Part B premium each month.

How much will Medicare Part B premiums rise in 2025? We don’t know for sure yet. CMS should reveal the amount of the increase soon. The announcement could come as early as this week considering that the agency published the Medicare Part B premium rates for 2024 on Oct. 12, 2023.

However, we do have a pretty good idea of how much Medicare Part B premiums will increase. On May 6, 2024, the Medicare Trustees released a report that estimated the standard monthly premium will jump from $174.70 to $185 — an increase of nearly 5.6%. Some individuals with higher incomes must pay higher premiums than the standard.

The bottom line is that Medicare Part B premiums will likely rise at a faster rate than your Social Security benefits will. As a result, every retiree who has their Part B premiums deducted from their Social Security benefits won’t see a 2.5% increase in the amount of money they actually receive.

The unfortunate reality of COLAs

This highlights the unfortunate reality of Social Security COLAs: They don’t always keep up with the highest costs of living incurred by retirees. A big part of the problem is the way the COLAs are calculated.

SSA uses an inflation metric called the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). While the CPI-W isn’t a bad way to measure inflation, it doesn’t fully reflect the increased costs paid by older Americans. In particular, the metric doesn’t give as much weight to healthcare costs as much as it should.

The good news is that all retirees who receive Social Security benefits will get a cost-of-living adjustment next year. The bad news is that this adjustment won’t keep up with all of the higher costs they’ll pay in 2025.

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