Three Social Security Regulations Set to Transform in 2025, along with a Long-Standing Rule in Need of Significant Modernization
Three Social Security Regulations Set to Transform in 2025, along with a Long-Standing Rule in Need of Significant Modernization
Oct. 10 marked a significant day for Social Security this year. That morning, the Social Security Administration revealed several crucial modifications to the program.
However, despite the program's evolution in 2025, one particular Social Security regulation continues to remain steady. Regrettably, this rule has been causing problems for retirees for years.
Moving on, here are the significant changes set to roll out starting January.
1. Benefits will experience a 2.5% increase in cost-of-living adjustment
Social Security benefits are poised to grow by 2.5% in 2025. Albeit it might appear to be a minor increase upon first glance, it's a positive sign, indicating a decrease in inflation.
The standard Social Security recipient can anticipate an increase of roughly $49 in their monthly benefit after implementing this cost-of-living adjustment. However, for those on Medicare, they should deduct approximately $10 due to an increase in Part B premiums.
2. Earnings-test limits are increasing
Social Security's earnings-test limits affect beneficiaries who have not attained their full retirement age and are generating income through employment. In 2025, the earnings-test limit will be $23,400, an increase from $22,320 in 2024. Beyond this threshold, $1 of Social Security benefits will be withheld for every $2 of earnings.
For those who will reach their full retirement age in 2025, the earnings-test limit is $62,160, a rise from $59,520 in 2024. Beyond this limit, $1 of Social Security benefits will be withheld for every $3 of earnings.
3. The wage cap is increasing
Workers only pay Social Security taxes on a portion of their earnings each year thanks to the annual wage cap established for the program.
In 2025, Social Security's wage cap will be $176,100, a boost from $168,600 in 2024. Higher earners will be subject to additional Social Security taxes on an extra $7,500 of income, leading to an increased total tax burden of $930. Employees share this liability with their employers, while self-employed individuals bear the full burden.
A rule that sorely needs revision
One Social Security regulation that will remain unchanged in 2025 is the threshold for taxing benefits. Social Security recipients must pay taxes on their retirement benefits depending on their combined income, which is half of their annual Social Security benefit along with other taxable income and interest income from sources such as municipal bonds.
However, the problem lies in the fact that these combined income thresholds were set many years ago and have not been revised since. Inflation and wage growth have occurred over time, yet these thresholds have remained unaltered. For single tax-filers, Social Security taxes apply to a combined income of $25,000 or more. For married couples filing jointly, the limit increases to $32,000, a modest increase for joint filers.
In total, these are rather low income levels given today's living expenses. Adjusting these combined income thresholds would undoubtedly provide relief to numerous seniors from paying taxes on their benefits.
Unfortunately, lawmakers do not seem to be prioritizing changes to this rule anytime soon. Consequently, retirees with reasonable incomes should not assume they will be retaining their Social Security benefits in their entirety. New Social Security recipients are often taken aback when they discover that their monthly benefits are taxable, so it is advisable to prepare for this eventuality in advance.
Despite these changes, it's important for retirees to consider the impact of taxes on their Social Security benefits. Although the wage cap for Social Security taxes is increasing, the threshold for taxing benefits remains unchanged, potentially causing financial strain for many retirees.
Considering that the combined income thresholds for taxing Social Security benefits were established decades ago and have not been revised since, retirees with moderate incomes may find themselves paying taxes on their benefits. With the cost of living and wages continuously rising, an adjustment to these thresholds could provide significant relief for many retirees.