Inflation presents a challenge for most American households, but it can be particularly pernicious for retirees who live on a fixed income. For that reason, retirees who have signed up for Social Security benefits closely monitor the annual cost-of-living adjustment (COLA) in their payments.
Those seniors may be disappointed by the increase in their benefits in 2025. If the inflation rate remains on track, the annual adjustment will be less than 3 percent, the smallest increase since 2021.
The 2025 COLA will be based on the Consumer Price Index for Urban Wage Earners and Clerical Workers in the third quarter of 2024. So if inflation rises before October, the COLA will be adjusted upward, or if inflation declines, the COLA will be reduced.
The estimated 2025 COLA would still be larger than the average COLA before the pandemic’s effects ignited the inflation rate. Still, the COLA would fall short of the rate of inflation for retirees’ actual costs, advocates for seniors say. Seniors who own their homes have been insulated from steep increases in monthly rents, but older homeowners still must pay property taxes and homeowners insurance, both of which have also risen sharply in recent years.
Health care costs have also risen faster than the rate of inflation and account for a disproportionate percentage of retirees’ overall costs, says Mary Johnson, a Social Security and Medicare analyst.
Inflation in health care costs increases Medicare Part B premiums, which cover doctor’s visits and other types of outpatient medical care. Most retirees have their Part B premiums automatically deducted from their Social Security payments, so an increase in premiums can diminish the boost from the COLA. In its annual report released in March, Medicare’s board of trustees predicted that standard Medicare Part B premiums will increase about 5.8 percent in 2025, to $185 a month, up from $174.70 a month in 2024.
Increases in Part B premiums reverberate a bit more for a subset of seniors who are subject to the Medicare high-income surcharge, also known as the income-related monthly adjustment amount. The surcharge is based on beneficiaries’ modified adjusted gross income from two years earlier, so the 2025 surcharge will be based on seniors’ MAGI in 2023. Seniors who are subject to it are expected to pay monthly Part B premiums ranging from $259 to $628.90, according to an analysis by Kiplinger.com.
Prices for prescription drugs also increase at a faster rate than inflation, Johnson says, although seniors with high drug costs will get some relief in 2025: Out-of-pocket costs for prescription drugs will be capped at $2,000 a year. The cap was included in the 2022 Inflation Reduction Act. The law also gives Medicare the ability to negotiate prices for some high-cost drugs, but that won’t have an appreciable effect on drug prices next year, Johnson says.
