Since it was first announced in October, the Social Security Cost of Living adjustment (COLA) has been provoking a lot of controversy.
The fact that the 2.5% was lower than what was expected or desired caused quite a commotion, with specialists disputing whether or not it was a positive development since it was so low.
Suze Orman, a financial expert, is one of the many experts who feels that the modest increase is good news for retirees. She has given her ideas on why this beneficial development should be recognized, and she is one of the many experts who believe that the low increase is good news.
“A smaller inflation adjustment can feel disappointing—we all want more money to cover living expenses—but it is actually good news, as it reflects that we are no longer dealing with basic expenses rising at a fast rate,” she said. “We all want more money to cover living expenses.”
It is possible that the disappointment will be even greater when compared to the adjustment of 8.7% that will be implemented in 2023; however, it is important to keep in mind that the inflation period that occurred in 2022 was extremely detrimental to the economy, and that the objective for 2025 is to achieve greater stability for all individuals, particularly those who are on fixed incomes.
How Social Security’s COLA Benefits Retirees
Orman reminds us that although everyone has their own conceptions of how Social Security benefits operate, they are intended to assist retirees in leading a pleasant life.
However, it is important to note that Social Security payments are not the only source of income that seniors should have and should depend on.
The primary difference between Social Security benefits and other types of savings plans, such as individual retirement accounts (IRAs) and 401(k) plans, is that Social Security is intended to assist recipients in maintaining their spending power despite fluctuations in the cost of living.
Orman explains that your investments in your individual retirement account (IRA) and 401(k) do not provide any assurances, let alone a built-in adjustment for increasing prices.
Orman explains that beneficiaries should not have to worry about that when they are working, despite the fact that waiting to claim will give you a better chance of having a livable income.
Many people are concerned that if they do not claim as soon as possible, they will miss out on some increases, particularly when it is a high year. However, Orman explains that this is not something that should be their concern.
A delay in filing for Social Security benefits can result in an increase in monthly benefits, particularly for individuals who wait until they reach their full retirement age or even age 70.
“If you delay collecting until your full retirement age (which is between 66 and 67, depending on your birth year) or until the age of 70, you will be entitled to a much larger benefit,” Orman says.
He also adds that annual COLA adjustments are applied even if you have not yet begun receiving benefits. You now have one less reason to feel the urge to claim an early Social Security benefit, which would result in a reduction in your benefits.
Working Beneficiaries and Income Limits
Despite this, there are beneficiaries who choose to take advantage of the fact that they can file their claims while they are working in order to attempt to obtain a bigger “salary” by filing their claims earlier.
Although this may be a smart strategy for certain people, such as when beginning an endeavor that is fraught with uncertainty, the reality is that the majority of retirees do not take into consideration the earnings cap that Social Security imposes on those who are still working and have not yet reached the age of full retirement.
In the year 2025, beneficiaries who are younger than their full retirement age will have their payments temporarily cut by one dollar for every two dollars earned in excess of $23,400.
In the year 2025, the maximum will be raised to $62,160 for individuals who have reached the age of full retirement.
On the other hand, there is some good news: as Orman explained, any benefits that are withheld as a result of this earnings test are only temporary.
Orman explained that whenever an individual reaches their full retirement age, their payout is recalculated to take into account any amounts that were withheld from them. This indicates that benefits that were disallowed will eventually be reinstated through revisions.
Social Security Wage Base Increase
Additionally, it is important for future beneficiaries to take into consideration the fact that the maximum amount of earnings that are due to Social Security tax will increase to $176,100 in the year 2025.
You will be able to better plan for your retirement if you are aware of the amount of your income that will be subject to taxation. This will also remove the element of uncertainty that is associated with determining the amount of benefits that you will receive in the future.
The planning process for retirement will go much more smoothly if you are aware of the changes that are occurring, as Orman recommends.