If Your Annual Income Falls Below $176,100, This Upcoming 2025 Social Security Adjustment Might Impact You.
New year brings fresh adjustments to Social Security, with the cost-of-living adjustment (COLA) being one of the major changes. The COLA for this year is set at 2.5%, which is predicted to increase the typical retiree's checks by roughly $50 each month.
However, the COLA isn't the only modification happening within the program. Each year, the program also adjusts various income restrictions, including the maximum benefit amount and the threshold for withholding benefits if you're still working while receiving Social Security.
If you haven't retired yet, there's a specific figure that could significantly impact your finances: the maximum taxable earnings limit.
What is the maximum taxable earnings limit?
The maximum income that can be taxed for Social Security purposes is capped at a certain amount, which is known as the maximum taxable earnings limit. The more earnings you make below this cap, the more taxes you pay, and the higher your future benefit will be.
The income limit will typically increase yearly to account for cost-of-living increases. In 2024, it will be $168,600 annually. Starting in 2025, the limit will increase to $176,100 per year.
This change will primarily affect individuals who earn between $168,600 and $176,100 annually, as they'll pay taxes on a larger portion of their income. However, even those earning significantly less than the wage cap could possibly feel the impact, as this limit determines how close you are to the maximum benefit amount.
How to reach the maximum benefit amount
As of 2025, the highest monthly payment you can receive from Social Security is an impressive $5,108. But in order to collect this sum, you must consistently reach the maximum taxable earnings limit throughout your career.
Higher earnings will lead to a higher benefit. Once your income surpasses the wage cap, those earnings will no longer be subject to Social Security taxes and will not affect your benefit amount. As the wage cap increments yearly, workers will require continually higher earnings to be eligible for the maximum benefit.
Reaching the maximum payment is quite challenging, given that it's strategically designed to be beyond the reach of the average worker. So, if you're below the mark, you're definitely not alone. However, there are other alternatives for increasing your payments besides earning a higher income.
1. Delay claiming benefits
Postponing your claim for Social Security by a few years is arguably the most effective method to substantially increase your payments. By postponing past the age of 62 and up to age 70, you'll earn incrementally bigger payments.
Frequently, this can add up to several hundred dollars more per month. According to data from December 2023 provided by the Social Security Administration, the typical retiree collects around $2,038 per month in benefits at age 70, while the typical benefit at age 62 is just $1,298 per month – a difference of around $740 per month.
2. Work for a minimum of 35 years
To determine your benefit amount, the Social Security Administration averages your earnings over the 35 highest-earning years of your career. That figure is then run through a complicated formula and adjusted for inflation, yielding the amount you'll collect at your complete retirement age.
Although you don't necessarily have to work for more than 35 years (in fact, you can typically qualify for retirement benefits after working for only 10 years), it could potentially increase your benefit amount.
Most people generally see their income rise as their careers progress. By retirement, you're likely making a much higher wage than when you first started working. Since only your top-earning 35 years are factored into your benefit calculations, working more years with a higher income can replace some of your lower-earning years, thereby increasing your benefit amount.
3. Utilize spousal or divorce benefits
If you're married or divorced, you could potentially qualify for spousal benefits based on your partner's work record. Divorced spouses must have been married for at least 10 years and be currently unmarried, and you'll need to be at least 62 years old to qualify for either kind of benefit.
In both scenarios, the maximum you can receive is 50% of the amount your spouse or ex-spouse will receive at their full retirement age. As of September 2024, the average spouse of a retired worker collects around $909 per month in benefits.
If you're already entitled to retirement benefits, you may still collect spousal benefits if those payments are greater. However, you'll only collect the higher of the two amounts – not both.
The maximum taxable earnings limit for Social Security taxes is set to increase to $176,100 per year starting in 2025, which could affect many individuals who earn between the previous and current caps. Managing finances wisely during retirement can help maximize Social Security benefits, and one strategy is to delay claiming benefits until age 70, as this can result in incrementally larger monthly payments.
