What you should know about this year's Social Security cost of living adjustment

NEW YORK (AP) — Tens of millions of older Americans will see a benefit increase in January when a new cost of living adjustment is added to the social security contributions.

The 2.5% increase is intended to help cover higher prices for food, fuel and other goods and services. According to the agency, the average recipient will see an increase of about $50 per month. Social Security recipients received a 3.2% increase in their benefits in 2024, and some retirees worry this year's increase isn't big enough to meet their needs.

The Social Security Administration will notify recipients of their new benefit amount by mail beginning in early December. The adjusted payments to nearly 7.5 million people receiving Supplemental Security Income will begin Dec. 31. Supplemental Security Income provides monthly payments to adults and children whose income is below certain financial limits and who are eligible for Social Security benefits.

Here's what you should keep in mind:

How does social security work?

About 72.5 million people, including retirees, disabled people and children, receive social security benefits.

The program is funded by income taxes subject to the Social Security payroll tax. The government uses taxes from working people to pay benefits to people who are already retired, people with disabilities, survivors of deceased workers, etc Relatives of the beneficiaries. In 2025, the Social Security payroll tax will be levied on the first $176,100 of income, up from $168,600 this year

While the money is used to pay people who are currently receiving benefits, the unused money goes to the Social Security trust fund. Some of the trust's money is used, along with workers' social security contributions, to fund future benefits.

To determine how much Social Security you will receive, the government calculates a percentage of your highest salary from the 35 years in which you earned the most, taking into account when you want to start receiving benefits.

How is the cost of living adjustment calculated?

The COLA is calculated using the Bureau of Labor Statistics' Consumer Price Index, but there are calls to use a different index – one that measures price changes based on older people's spending patterns – such as health care, food and drug costs.

The smaller increase for 2025 is due to inflation slowing. That means prices are no longer rising as quickly as they did at the height of the COVID pandemic. The recipients received a historically large Performance increase of 8.7% in 2023 because of record high inflation.

Is the trust running out of money?

Future problems with the fund have long been predicted, largely due to demographic changes. When birth rates fall, fewer people enter the workforce, which leads to lower payroll tax payments. More and more baby boomers are now retiring and receiving social security contributions.

The Annual Trustees for Social Security and Medicare Report published in May said that starting in 2035, the program's trust fund will no longer be able to pay full benefits. When the trust fund is depleted, the government will only be able to pay 83% of planned benefits, the report said.

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