A new 2.5% cost-of-living adjustment
In 2025, retirement benefits will increase by about $50 per month, on average, according to the Social Security Administration.
That’s as all beneficiaries will see a 2.5% benefit increase due to the annual cost-of-living adjustment.
Notably, the benefit boost for 2025 will be the lowest since 2021. As the pace of inflation has subsided, the cost-of-living adjustment has come down with it, since the Social Security Administration uses government inflation data to calculate the annual change.
Beneficiaries saw the highest increases in four decades in 2023, when the COLA was 8.7%, and in 2022, when benefits went up by 5.9%. However, the annual COLA started to come down in 2024, with a 3.2% annual adjustment.
“Although price increases have moderated, it’s not as though inflation is over,” said Joe Elsasser, a certified financial planner and president of Covisum, a Social Security claiming software company.
If the pace of inflation picks up again, the annual COLA could go up again, he said.
Monthly Medicare Part B premiums to go up
Retirees who are enrolled in Medicare Part B — which covers physician services, outpatient hospital services and certain home health services and durable medical equipment — pay monthly premiums.
Medicare Part B premiums are often deducted directly from Social Security checks. Beneficiaries can also request to have Medicare Advantage or Part D premiums deducted from Social Security benefit payments, according to Mary Johnson, an independent Social Security and Medicare analyst.
In 2025, the standard monthly Part B premium will go up to $185 per month — a $10.30 increase from $174.70 this year.
At the same time, Medicare Part B beneficiaries will see their annual deductibles go up to $257 in 2025 — a $17 increase from the $240 annual deductible for 2024.
Medicare Part B premiums are based on a beneficiary’s modified adjusted gross income, or MAGI, from two years prior. In 2025, beneficiaries who had less than or equal to $106,000 in MAGI in 2023 will pay the standard monthly Part B premium, as will married couples with less than or equal to $212,000.
However, beneficiaries with higher incomes will be subject to income-related adjustment amounts, or IRMAA, that increase their monthly premium payments.
About 8% of Medicare Part B beneficiaries are affected by those income-related adjustments, according to the Centers for Medicare and Medicaid Services.
Income changes may prompt higher taxes
Social Security beneficiaries may request to have withholding for federal taxes from their benefit payments.
Beneficiaries may want to consider whether they want to adjust those withholdings, particularly if they anticipate more of their benefits could be taxed, according to Jim Blair, vice president of Premier Social Security Consulting.
Social Security benefits are taxed on a formula called combined income — the sum of adjusted gross income, nontaxable interest and half of Social Security benefits. Beneficiaries may pay no taxes on their benefits, if their combined income is low enough, or up to 50% or 85% of their benefits may be subject to federal taxes if their combined incomes are above certain thresholds.
“What we’ve seen with clients is kind of a surge in other income that has caused more of their Social Security to be taxed,” said CFP Brian Vosberg, president of Vosberg Wealth Management in Glendora, California.
For example, retirees who have $200,000 in money market accounts or certificates of deposit are seeing higher interest payments on that sum after the Federal Reserve’s string of rate hikes in recent years. That interest income may require beneficiaries to pay a higher federal tax rate on their benefits, Vosberg said.
Proactive tax planning can help alleviate that situation, Vosberg said. Strategies such as buying an annuity that lets that interest grow tax deferred or reducing income from other areas, such as IRA withdrawals, can help minimize the tax bite, he said.
Retirees should also take note if their incomes have meaningfully changed in the past couple of years, according to Blair. If that’s the case, their monthly Medicare Part B premium rate may no longer be accurate. Beneficiaries can notify the Social Security Administration of life-changing events that affect their incomes and Medicare premiums by filling out a Form SSA-44.