BRN: The Social Security COLA

The Street

TheStreet's Maurie Backman joins Broadcast Retirement Network host Jeffrey Snyder to talk about the annual increase.

Transcript

00:00this morning on brn the impacts of the 2025 social security cola joining me now to discuss

00:11this and a lot more maury backman is a senior financial journalist maury happy new year great

00:17to see you thanks for joining us on the program this morning thanks so much for having me i'm

00:21really excited to talk about social security because you know a new year means changes to

00:26the program as always yeah let's let's talk about that maury and and you know i think our our audience

00:32is very familiar with your work because um you've been on the program numerous times before let's

00:39talk about the cost of living adjustment or cola for 2025 what is it and what does it mean sure so

00:48um years back lawmakers decided that social security benefits were going to be eligible for an automatic

00:55cola uh the cola was going to be pegged to inflation so that you know inflation rises benefits get a

01:02little bit of a boost and when you think about it i mean it it makes sense to have colas be automatic

01:07as opposed to needing you know congress to vote in a raise to social security benefits year after year

01:15just makes the process a lot more seamless um and logically you know there are people who collect

01:21social security for 15 20 30 years and the value of a dollar is going to get eroded over a period that

01:29lengthy so we need social security colas to enable seniors to be able to maintain their buying power

01:36as living costs go up so every every year social security gets a cola uh well actually i shouldn't say

01:43that every year social security is eligible for a cola um when inflation remains flat

01:50social security benefits remain flat when there's a decrease in inflation from one year to the next

01:57social security benefits also remain flat luckily there's no such thing as a negative cola

02:02so you're not going to see your social security benefit decrease thankfully from one year to the next

02:08even if inflation goes that route you're only going to see your benefit stay the same or go up

02:13yeah and can you imagine maria if there was a negative cola and they started trying to reclaim

02:19social security benefits you imagine all the people that would be lined up at the social security

02:23administration uh good good good for them that they don't have a negative cola maria let's talk about

02:29inflation because we have seen over the last year plus food prices increase get gasoline prices

02:36increase other prices increase how does this cola factor that in and how does it compare maybe to

02:43previous years sure so you know thankfully inflation has cooled pretty nicely over the past year

02:51we're not seeing the same levels of inflation that we did back in 2021 um on the heels of all those

02:57stimulus policies we're not seeing the same level of inflation as 2022 um the funny thing about social

03:04security colas and inflation is that you know the way i've always tried to explain it is they sort

03:10of cancel each other out so this year's cola is 2.5 percent benefits are rising two and a half percent

03:17and a lot of seniors are frankly bummed about that because when we look back to you know recent colas

03:24the year before benefits went up 3.2 percent before that we had some of the largest colas in history we had

03:328.7 we had 5.9 these were the colas that came about following that period of real rampant inflation

03:39that we saw following the pandemic so you know a lot of people are pretty up in arms about this 2.5

03:45cola oh it's not enough it's such a measly little raise but the thing to remember is that because

03:54colas are tied to inflation when you have a not so generous cola it also means that inflation hasn't been

04:01all that bad you kind of can't have one without the other right so you know when seniors were seeing

04:07their benefits rise almost six percent or close to nine percent i mean all those colas did was match

04:14inflation so what you gain in one regard you gain a higher boost a larger boost your social security

04:21benefit you lose in the form of prices really going up a lot significantly from one year to the next

04:28so in the past year what we've seen is yes we have seen costs continue to go up and look i'm not

04:34retired but i've seen my own bills increase exponentially and i've got a family to feed and

04:40it's stressful it's stressful going to the supermarket and buying like six yogurts and a jug of milk and a

04:47loaf of bread and it's like that'll be 22.50 and it's like what this this was like these are groceries

04:54that i'm carrying out in my hand you know and and a week's worth of food for my family i mean

04:59it seems like i'm paying more than ever so i'm definitely sympathetic to seniors who feel

05:04that you know their 2.5 cola is not really going to cut it for 2025 i can see where they're coming from

05:12because costs are still high but things could also be worse well they could be worse um mari they could

05:22be a lot worse uh i want to ask you about taxation because how does taxation or does taxation factor

05:30into this cost of living adjustment does that does that mean anything to those directly taking social

05:38security so it's a funny thing so um seniors are often shocked to learn that social security benefits

05:47can be taxable at the federal level there can also be state taxes on social security actually

05:51depending on the state you live in and the amount of your total income but the federal government

05:57can tax a portion of your social security benefits and that doesn't sit well for a lot of seniors it

06:04almost feels kind of like a double taxation right because throughout our working years we're all paying

06:09into social security on our wages and you know the promise is that you're going to pay taxes you're

06:16going to pay into social security but then when you're older and retired you're going to get a monthly benefit

06:20and then it's like hey guess what you're not necessarily going to keep that monthly benefit in

06:25full because once your income exceeds a certain threshold a portion of your benefits can be taxed

06:31now here's the problem um social security is eligible for an annual cola which means that benefits

06:41historically like have risen from one year to the next there have been a few years in history with a zero

06:47cola but for the most part we have seen benefits rise from one year to the next the problem is that

06:55the income thresholds that determine whether you're going to pay taxes on your social security benefits

07:01those income thresholds have not increased since 1984 so long time ago the law that's a long time

07:13ago i was 12 i was 12 maury so i'm not going to say how old i was but i was i was around uh it was a

07:20long it was a long time ago so you know when you when you kind of just then logically put those two pieces

07:28together it's like well wait a minute you know so social security benefits rise every year and social

07:34security benefits are calculated in the formula that determines your income and that determines

07:41whether your income is high enough to have your benefits tax if you get what i'm saying basically it's

07:47a concept called combined income it's a factor of your adjusted gross income it throws in any uh like tax

07:56exempt interest income you receive like if you're a municipal bond investor you might get some tax

08:02free income that's counted as your into your combined income and then also half of your annual social

08:06security benefit is factored into your combined income and basically if you're single once your

08:13combined income is 25 000 or higher you're going to be paying taxes on a portion of your social security

08:20benefits now let's think about that 25 000 i mean you know yes that's factoring in half your annual

08:30social security benefit but even if we want to pad that by another 10 12 000 let's let's let's talk about

08:3537 000 a year 40 000 a year are you like rolling in dough at 40 000 a year i'm not no you're typically at

08:47a you know especially if you're a retiree you're at a fixed income um and and so that you know one

08:54of the things i want to ask you about i want to kind of close on this is you talked about taxation now

08:59during the campaign and we're not a political show but you know there there were some policy uh

09:06preferences or or suggestions about eliminating the tax on social security first mari

09:12is that possible and what would that mean to uh our conversation this morning about the cost of

09:19living adjustment so that's a tricky thing too because so president-elect trump has uh has pledged

09:27to eliminate taxes on social security benefits and a big part of me wants to say that that's a really

09:34good idea because there's a lot of people whose income is really right above that threshold where

09:40they're liable for taxes right but since we just discussed that it was such a low tap such a low

09:45threshold these people cannot afford to lose some of their benefits to taxes so in that regard i think

09:54eliminating taxes on social security benefits could be a positive thing but then we also have to remember

10:00that social security doesn't just get funded by payroll taxes it also it gets funded by these taxes on

10:08benefits now as it stands we are already looking at a funding shortfall for social security the

10:14program's combined trust funds are set to run dry in 2035 and at that point benefit cuts could be on

10:22the table so now we have to balance the upside of you know not taxing social security so that seniors get

10:31to keep their benefits in full now versus the potential downside of well then what does that do to

10:38social security's overall financial picture and what does that mean for benefit cuts down the line

10:44it's a it's a very tricky thing and i do not envy lawmakers who have to you know make these decisions

10:51and and jeff to be clear you know there's a push to not only end taxes on social security benefits but

10:59also to change the way social security polas are calculated that's a whole other issue because the

11:06reality is that the formula that's used now is not very beneficial to seniors it really does not

11:10very accurately capture the costs that seniors specifically tend to incur so that's there's lawmakers really

11:19have their work cut out for them in the coming years with regard to social security they they certainly

11:24do mari we've got a new congress a new president hey look they can't kick the can down the road too much

11:30longer because they're going to have to deal with other potential challenges mari it's always great

11:35to see you expert analysis as always thanks so much for joining us and we look forward to having

11:40you back on the program again very soon sounds great and don't forget to subscribe to our daily

11:45newsletter of the morning pulse for all the news in one place details of course at our website and

11:50we're back again tomorrow for another edition of brn until then i'm jeff snyder stay safe

11:55keep on saving and don't forget roll with the changes

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