The smaller Social Security tax in 2025 has a hidden silver lining for retirees

For those watching Social Security’s 2025 cost-of-living adjustment (COLA), bad news just came out. The latest nonpartisan Senior League estimate puts the 2025 COLA at 2.57 percent.

That’s down from previous estimates. And it’s a considerably lower COLA than the 3.2 percent increase seniors receive at the start of 2024.

Image source: Getty Images.

Now, before we go any further, it should be noted that this latest estimate is just that — an estimate. We won’t have an official reading on the 2025 Social Security COLA until October because that increase is calculated based on July, August and September inflation data.

But based on recent inflation trends, it’s fair to assume that the Social Security COLA in 2025 will be lower than in 2024. That’s not a totally bad thing, though.

You see, a lower COLA is an indication that inflation is easing. So what retirees lose in the form of a smaller boost, they gain in the form of more affordable food, gas, utilities and more.

But that’s not the only hidden benefit of a lower COLA. There’s another reason retirees shouldn’t be too upset about this 2.57% projection.

Smaller increases could help delay Social Security cuts

Social Security is facing a financial crisis. In the coming years, the program will be burdened with claims for benefits as older Americans retire en masse. But in addition to having to pay more benefits, Social Security will also lose payroll tax revenue because of the increase in pensions. And that’s problematic because that’s the program’s main source of income.

Social Security can use its trust funds to keep up with scheduled benefits for about 10 years. But once those trust funds run out, benefit cuts will be on the table.

How does this relate to next year’s Social Security COLA? The smaller the increase, the less Social Security has to pay — and the less strain there is on the program’s limited financial resources.

In other words, a higher COLA could bring Social Security a little closer to having to implement benefit cuts. So while retirees may want to see their benefits increase more in 2025, a smaller increase could be a factor that helps delay the benefit cut a bit longer.

A problem that parliamentarians must solve

Of course, an ideal scenario would have Social Security avoid benefit cuts entirely. A broad cut in benefits could be catastrophic for the millions of retirees who rely heavily on Social Security today.

This is a situation that lawmakers will have to address soon. But for now, a lower Social Security COLA in 2025 could be good news in the context of benefit cuts.

That doesn’t mean a lower COLA won’t hurt retirees. But those who have to struggle in the light of one may have to take external measures to increase their income. These could include downsizing or part-time work.

Social Security allows seniors to work while receiving benefits, although those who have not yet reached full retirement age are subject to an earnings limit. But the 2024 earnings limit is $22,320 for Social Security recipients and $59,520 for those who reach full retirement age before the end of the year and haven’t gotten there yet. These limits give seniors plenty of leeway to increase their earnings before they reach a point where a portion of their Social Security check is withheld from earning too much.