Preparing for Significant Adjustments in Social Security Benefits for Employed Individuals in 2025.
Preparing for Significant Adjustments in Social Security Benefits for Employed Individuals in 2025.
In October, over 68 million individuals collected an average Social Security check of $1,787.08. Despite this modest monthly payment, it plays a significant role in the financial stability of many recipients, particularly retired workers.
No program has a more significant impact on lifting individuals out of poverty each year than Social Security. A study by the Center on Budget and Policy Priorities reveals that around 22.7 million people were moved above the federal poverty line in 2022 due to Social Security, including 16.5 million adults aged 65 and above.
Moreover, 23 years of annual surveys by national pollster Gallup showed that between 80% and 90% of retirees (with 88% in 2024) rely on their Social Security benefits to some extent to cover their expenses.
Notably, the announcement of the Social Security Administration's (SSA) cost-of-living adjustment (COLA) is highly anticipated each year. On October 10, 2024, the SSA unveiled a 2.5% COLA for 2025, which marks the fourth consecutive year that benefits have risen at an above-average pace. This increase will mean an extra $49 per month for the average retired worker, while the average worker with disabilities and survivor beneficiary will see an increase of $38 per month.
However, 2025 is not just about the COLA. There are significant changes in store for those still working and receiving Social Security checks.
Adjustments to retirement earnings test penalties
The most significant change in 2025 for beneficiaries who are still working pertains to the adjustments made to income thresholds associated with the retirement earnings test. This test allows the SSA to withhold some or all of benefits based on earnings and the beneficiary's age.
Your full retirement age marks when you become eligible for 100% of your retired-worker benefit, and it depends on your birth year. For individuals born in or after 1960, the full retirement age is 67.
These retirement earnings test penalties no longer apply once you reach your full retirement age. However, if you haven't reached your full retirement age and are collecting monthly payments, penalties may be imposed.
For example, currently, early filers who will not reach their full retirement age in 2024 will have $1 withheld for every $2 in earned income (excluding investment income) above $22,320 ($1,860 per month). In 2025, this category of early filers will be allowed to earn up to $23,400 ($1,950 per month) before withholding begins.
Benefit withholding limits are much more lenient for early filers who will reach their full retirement age in 2025. In 2024, the SSA can withhold $1 for every $3 in earned income above $59,520 ($4,960 per month). In 2025, this income threshold expands to $62,160, or $5,180 per month.
Remember that the withheld benefits are not gone permanently. They will be returned to you in the form of a higher monthly payout once you reach your full retirement age.
Changes to disability income thresholds
Alongside the earned income thresholds adjustments in the retirement earnings test, the withholding thresholds for Disability Insurance Trust Fund beneficiaries are also rising.
In 2024, non-blind workers with disabilities could earn up to $1,550 each month without facing any penalty. In 2025, this limit increases to $1,620 per month, allowing non-blind workers to earn up to $840 more per year without facing any penalties.
The income threshold adjustment is even more substantial for blind workers with disabilities. In 2024, blind workers could earn $2,590 per month without having their Social Security disability benefit stopped. In 2025, this threshold rises to $2,700 per month.
Enhanced chances of being taxed on your Social Security benefit
Lastly, workers receiving Social Security benefits should be aware of the increasing likelihood of being taxed on a portion of their payout at the federal level and in nine states.
In 1983, as Social Security's asset reserves dwindled, and the prospect of sweeping benefit cuts loomed without reform, the Social Security Amendments of 1983, which represent the last significant overhaul of America's leading retirement program, gradually increased payroll taxation and the full retirement age, as well as the introduction of the taxation of benefits.
Starting in 1984, up to 50% of benefits could be subject to federal taxation if provisional income (adjusted gross income + tax-free interest + one-half of benefits) exceeded $25,000 for a single filer or $32,000 for a joint filer. In 1993, a second tier was added that exposed up to 85% of benefits to federal taxation if provisional income went beyond $34,000 for a single filer or $44,000 for a joint filer.
The predicament for employed individuals receiving benefits is quite complex. Initially, these taxation limits have never been altered to match inflation's rise. Secondly, the cost-of-living adjustments have continuously enhanced the real-dollar payouts, thereby increasing the likelihood of beneficiaries encountering some degree of federal tax on their Social Security payments.
As Social Security is estimated to have a substantial financing deficit of approximately $23.2 trillion till 2098, there seems to be no motivation to modify these thresholds to account for inflation (essentially, the program is in need of every penny it can get). In simpler terms, the likelihood of present and future retirees paying tax on a portion of their benefits intensifies with each COLA.
In light of the changing retirement earnings test penalties, individuals who are still working and collecting Social Security checks before reaching their full retirement age in 2025 will see an increase in the income threshold at which benefits start being withheld. Currently, early filers have a limit of $22,320 ($1,860 per month) before withholding begins, but this will increase to $23,400 ($1,950 per month) in 2025.
As retirees continue to rely heavily on Social Security for their financial stability, it's important to consider the potential tax implications. The Gradually Increased Taxation of Social Security Benefits was introduced in 1983, and since then, up to 50% of benefits can be subject to federal taxation if provisional income exceeds $25,000 for a single filer or $32,000 for a joint filer. With the annual cost-of-living adjustments (COLA) increasing the real-dollar payouts, more beneficiaries may encounter some degree of federal tax on their Social Security payments.