Anticipated Average Decrease of 20% in Retirees' Realized Social Security Income Boost in 2025 May Surprise Seniors
Anticipated Average Decrease of 20% in Retirees' Realized Social Security Income Boost in 2025 May Surprise Seniors
With barely six weeks left, retirees are anticipating a boost in their pension. The Social Security Administration lately declared that the upcoming Consumer Price Index Adjustment (CPIA) will be 2.5%. This change will be implemented on January 1, 2025.
However, retirees should not expect to profit from the complete 2.5% increase. Here's why the actual augmentation in monthly Social Security payouts for retirees will be approximately 20% less than anticipated.
Expected Social Security pension for retirees in 2025
Every October, the Social Security Administration calculates the annual CPIA for all Social Security beneficiaries. This tradition has been upheld since 1975, when the automatic Social Security CPIA adjustments commenced.
The CPIA is computed by comparing the average Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) for the third quarter of the current year to the average CPI-W for the third quarter of the preceding year. The Social Security adjustment is the percentage increase (if any) in this metric, rounded to the nearest 0.1%.
When the Social Security Administration declared the 2025 CPIA, it mentioned that the average retirement benefits will increase by "approximately $50 per month" next year. In October, the typical monthly Social Security pension for retired workers was $1,924.35. A 2.5% increase would amount to an additional $48.11 per month.
The reason for the reduced actual increase
Nonetheless, most retirees won't receive an additional $48.11 (or $50) per month after the 2025 Social Security CPIA is implemented. It's important to note that the Social Security Administration isn't intentionally underpaying retirees. The lower net gain is due to a benevolent reason.
Medicare Part B premiums are automatically deducted from retirees' monthly Social Security pensions if they are enrolled in both Social Security and Medicare Part B. Additionally, Medicare Part B premiums are escalating in 2025.
On November 8, the Centers for Medicare and Medicaid Services (CMS) revealed the premiums, deductibles, and copays for all Medicare plans for 2025. The standard Medicare Part B premium will rise by $10.30 per month to $185.
Consequently, the net increment after the CPIA comes into effect will be around $37.81 -- roughly 20% less than what retirees might have assumed following the Social Security Administration's CPIA announcement last month.
Keep in mind that we're only discussing averages here. Retirees with pensions above the average won't be affected as much by the increased Medicare Part B premiums. However, retirees with pensions significantly below the average may feel the pinch more. It's also worth mentioning that high-income beneficiaries pay higher premiums for Medicare Part B and will experience even more premium increases next year.
Some good and not-so-good developments
There's also some latest information for retirees, some of it positive and some not so positive. While the average year-over-year CPI-W increase for the third quarter was 2.5%, the CPI-W rose by just 2.4% year over year in October. This slight improvement was better than the "headline" inflation increase of 2.6%.
The negative news, though, is that costs in certain categories that hit retirees harder are rising faster than overall inflation. Particularly, medical care services went up by 3.8% year over year.
Inflation may decrease in the new year, but it could also intensify again. Regardless, Social Security's 2025 CPIA may not extend as far as many retirees would like.
Despite the anticipated 2.5% increase in Social Security pensions due to the CPIA, retirees might only see a 20% lesser amount added to their monthly payouts. This reduction is primarily due to the rising Medicare Part B premiums, which are expected to increase by $10.30 per month in 2025.
In the context of retirement finance, it's crucial for retirees to plan their budgets considering not just the expected pension increase, but also the potential impact of increasing Medicare Part B premiums on their overall income.