Understanding the Five Notable Adjustments to Social Security for Retirees in 2025
Understanding the Five Notable Adjustments to Social Security for Retirees in 2025
2024 is drawing to a close, and a plethora of modifications and updates are scheduled for the realm of Social Security in the upcoming year. Majority of these alterations are inflation-driven, impacting both retirees who currently receive Social Security and those preparing to start their benefits or are still employed.
Let's dive into five transformations to Social Security that will occur in 2025 which you should be aware of.
1. 2025 Social Security COLA
Social Security recipients will receive a 2.5% inflation-adjustment, or COLA, starting from their January 2025 payment. According to the most recent data from October, the typical retired worker receives an average of $1,925.46 per month from Social Security. This suggests that the average will rise to approximately $1,974 once the COLA takes effect.
2. Social Security benefit formula
Although the basic structure of the Social Security formula remains unchanged, the so-called "breakpoints" are undergoing modification.
The Social Security formula works by indexing your 35 highest-earning years for inflation, averaging them, and then applying this average to a formula with three multipliers – 90%, 32%, and 15%. Although these percentages remain consistent each year, the sums of money they are applied to, known as the breakpoints, change. For those eligible in 2025, the calculation for average indexed monthly earnings (AIME) is as follows:
- 90% of the first $1,226.
- 32% of the value between $1,226 and $7,391.
- 15% of any AIME that surpasses $7,391.
3. Maximum attainable Social Security benefit
Due to inflation-related adjustments, the maximum possible Social Security benefit is increasing. The highest benefit an individual who retires at their full Social Security retirement age in 2025 can receive is $4,018 per month. Keep in mind that the majority of people do not collect Social Security at their exact retirement age:
- The maximum possible benefit for someone retiring at 62 in 2025 will be $2,831 per month.
- The maximum attainable benefit at age 70 is $5,108 per month.
4. Contribution and benefit threshold
This modification affects both individuals who are still working as well as those about to begin their Social Security payments. In 2025, the contribution and benefit ceiling will rise to $176,100 from its 2024 level of $168,600.
This figure is commonly referred to as the "Social Security taxable maximum earnings," as the 6.2% Social Security tax paid by employers and employees only applies to this income level. Furthermore, it plays a role in benefit calculation, serving as the maximum sum utilized to determine AIME (average indexed monthly earnings), as previously discussed.
5. Earnings while collecting Social Security
Lastly, the Social Security earnings test limits are evolving for 2025. If you are not familiar with this concept, individuals who have not yet reached full retirement age and are collecting Social Security have a maximum income they can earn while still receiving benefits. There are two parts to the earnings test:
- If you reach full retirement age after 2025, up to $1,950 in monthly earnings can be excluded. Above this threshold, $1 in benefits is withheld for every $2 in excess earned income.
- If you reach full retirement age during 2025, up to $5,180 per month can be excluded, and $1 can be withheld for every $3 earned above this amount.
It is essential to note that any deducted funds are not irretrievable – once you reach full retirement age, any funds withheld under the earnings test will contribute to a higher benefit.
Major alterations may still be on the horizon
As you can see, none of these are true "changes" in the sense that the Social Security regulations will remain the same from 2024 to 2025. However, with Social Security projected to run deficits in the foreseeable future and expected to deplete its funds within a decade, more significant changes will necessitate implementation. If you are at or nearing Social Security eligibility, stay informed about the latest developments.
- Understanding the impact of these changes, individuals planning for their retirement should review their financial strategies to ensure they are maximizing their Social Security benefits.
- Asinflation-driven modifications to Social Security continue to unfold, it's crucial for both retirees and those approaching retirement to regularly reevaluate their retirement savings and adjust their retirement income plans accordingly.