For most retirees, Social Security doesn’t just provide a monthly check. On the contrary, it lays a financial foundation that retirees would find difficult to live without.

Based on an analysis by the Center on Budget and Policy Priorities (CBPP), the poverty rate for adults age 65 and older on Social Security is 10.2% as of 2022. If this crucial program did not exist, the CBPP estimates the poverty rate for adults age 65 and older would be a staggering 38.7%!

More than two decades of annual Gallup surveys emphasize the importance of Social Security income for workers who can no longer care for themselves. Between 80% and 90% of retirees surveyed rely on their monthly check in some capacity to cover their expenses, including 88% in the April 2024 survey.

Image source: Getty Images.

With Social Security playing such an important role in helping retirees pay their bills, it should come as no surprise that the Oct. 10 announcement of the 2025 Cost of Living Adjustment (COLA) is a highlight of the year was.

But even if the COLA for 2025 was above average, retirees should not expect to receive the full pay increase.

The increase in social security in 2025 will be above average for the fourth year in a row

The “COLA” that Social Security passes to beneficiaries most years is the program’s mechanism to fight back against the loss of purchasing power due to inflation. In other words, if the price for goods and services collectively increases, Social Security benefits should ideally increase by the same percentage to ensure that seniors do not lose their purchasing power.

In the 2010s, Social Security increases were minuscule. Only two out of ten years exceeded 2% during the decade, with deflation leading to no COLA passing in 2010, 2011 and 2016.

But over the past four years, Social Security recipients’ pockets have grown significantly. In 2022, 2023 and 2024, beneficiaries received increases of 5.9%, 8.7% and 3.2% respectively. Notably, the 8.7% increase in 2023 was the largest in percentage terms in 41 years, and the largest from a nominal dollar perspective since the program’s inception.

In 2025, beneficiaries will receive a 2.5% increase, which is slightly higher than the average COLA of 2.3% over the previous 15 years.

While this represents the lowest COLA in percentage terms since 2021’s 1.3% increase, it will still be welcome after several years of above-average inflation. The average retired worker is expected to see their monthly check increase by $49 to $1,976. Meanwhile, workers with disabilities and survivors should see their respective average monthly payouts increase by $38 each to $1,580 and $1,551.

Image source: Getty Images.

Retirees are unlikely to feel the full effect of their 2.5% Social Security increase in 2025

But as the old saying goes, “Don’t count your chickens before they hatch.” Although on paper retirees will receive a 2.5% COLA in the coming year, there is one extremely Chances are they will kiss a significant part of this goodbye.

For starters, the Medicare Trustees Report, released in May, estimates that the Part B premium will increase 5.9% to $185 per month in 2025. Part B is the segment of Medicare responsible for outpatient services.

For Social Security beneficiaries who are also enrolled in traditional Medicare (the age of eligibility for Medicare is 65), the Part B premium is usually deducted from their monthly Social Security benefit. Although Social Security’s COLA increases benefits by 2.5% annually, the Medicare Trustees Report expects monthly Part B premiums to increase by just over $10 per month by 2025. In other words, most retired workers will receive some, or possibly all, of their 2025 COLA, offset by a significant increase in Medicare’s Part B premium.

But this is only part of the challenge that awaits retirees in 2025.

In addition to most elderly beneficiaries losing some or all of their wages to higher Part B premiums, steadily increasing COLAs over time continue to expose a larger percentage of retirees to the taxation of Social Security earnings .

In 1983, with Social Security’s asset reserves on the brink of depletion, Congress passed the Social Security Amendments of 1983, and then-President Ronald Reagan signed them into law. This latest major overhaul of America’s leading retirement program gradually raised the full retirement age and payroll taxes for workers, and introduced the now-hated tax on benefits.

Beginning in 1984, up to 50% of Social Security income became taxable at the federal level if preliminary income—adjusted gross income plus tax-free interest plus 50% of Social Security benefits—exceeded $25,000 for a single filer and $32,000 for an individual. couple filing jointly. In 1993, the Clinton administration added a second tax rate, exposing up to 85% of Social Security income to federal taxes if preliminary income was $34,000 and $44,000, respectively, for single filers and couples filing jointly.

The problem is that these preliminary income thresholds have not been adjusted for inflation once since they were introduced decades ago. With each passing COLA that increases benefits, a greater number of retirees are exposed to the taxation of benefits.

Whether it’s Medicare Part B or the federal tax on benefits, most retirees won’t feel the full effect of their 2.5% COLA in 2025.

The $22,924 Social Security bonuses that most retirees completely overlook

If you’re like most Americans, you’re a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could give your retirement income a boost. For example, one simple trick can save you as much as $22,924 more… every year! Once you learn how to maximize your Social Security benefits, we think you can retire confidently, with the peace of mind we’re all looking for. Click here to find out how you can learn more about these strategies.

Check out the “Social Security Secrets” »

The Motley Fool has a disclosure policy.