Upcoming Changes in Social Security: Five Significant Updates to Anticipate in 2025
Social Security's 90th birthday is approaching in 2025, and the program has undergone numerous alterations over the years. The government regularly tinkers with the program to boost revenue from taxes and enhance retirement benefits, among other adjustments.
The following year won't be any different, as there are five significant modifications you can expect within weeks. These changes might not impact everyone, but even a single adjustment could have a substantial impact on your future or current benefits.
1. 2.5% cost-of-living adjustment (COLA)
The past few months have seen an announcement about the 2025 COLA, which stands at 2.5%. Compared to the 3.2% increase retirees experienced last year, this is a decrease. It's expected to boost the average monthly check from $1,927 to $1,976, providing beneficiaries with an additional $588 to spend throughout the year.
Some individuals may receive more than this, depending on their current benefits exceeding the average benchmark. The Social Security Administration is mailing COLA notices to all beneficiaries this month, detailing their specific 2025 benefit amount. Individuals with a my Social Security account can also view this notice in their Message Center.
2. Revised definition of a Social Security credit
To qualify for retirement benefits, one must earn a total of 40 Social Security work credits throughout their career. A credit is equivalent to a specific dollar amount of income on which Social Security taxes are paid annually, with a maximum of four credits permitted per year.
The definition of a credit will increase in 2024, as $1,730 of income will now yield one credit, rising to $1,810 in 2025. Most individuals should not notice this adjustment, as many part-time workers will still meet the $7,240 threshold needed for their four work credits in 2025.
3. Elevated cap on Social Security payroll taxes
At present, only income up to $168,600 is subject to Social Security payroll taxes, despite the high limits meaning many individuals pay taxes on their entire earnings. However, the wealthiest Americans are not affected by these high limits.
In 2025, these individuals will have to pay a slightly higher amount as the Social Security payroll tax ceiling rises to $176,100. Self-employed individuals paying both their employee and employer taxes could be liable for an additional $930 in taxes, while traditional workers with salaries may face a $465 increase due to the higher income limits.
4. Enhanced full retirement age (FRA)
Your full retirement age (FRA) is the age at which you are entitled to your full Social Security benefit, which is determined by your birth year. Individuals born between 1943 and 1954 currently have an FRA of 66. However, the government has been increasing the FRA by two months each year for the past several years.
In 2024, FRA increases to 66 and 8 months, but this will further rise to 66 and 10 months in 2025. A similar trend will continue in 2026, when FRA reaches 67 for individuals born in 1960 and beyond. After this, FRA will remain stable at least in the near future.
It's not mandatory to wait until your FRA to claim benefits – you can apply as early as 62, regardless of your FRA. Claiming early results in reduced benefits, so it's essential to weigh all possible claiming ages to choose the best option for you.
5. Elevated limits on Social Security earnings tests
The Social Security earnings test reduces benefits paid to workers below their FRA who earn an income beyond a specific threshold and collect benefits. In 2024, you stand to lose $1 for every $2 you earn above $22,320, with those reaching their FRA in 2024 losing $1 for every $3 they earn above $59,520, if they reach that amount before their birthday.
For 2025, these limits increase to $23,400 and $62,160, allowing these individuals to earn more income before having their benefits withheld.
Rest assured, any income withheld from your checks due to the earnings test is not forfeit permanently. You will receive it back once you reach your FRA and the government increases your benefit to make up for the withheld amount.
- As individuals approach retirement, it's crucial to consider how these changes might impact their money management and retirement plans, with the 2.5% COLA and revised definition of a Social Security credit being some of the factors to consider in their financial strategy.
- For those planning their retirement finances, understanding these modifications, such as the increased cap on Social Security payroll taxes and elevated limits on Social Security earnings tests, can help in making informed decisions and preparing their retirement savings accordingly.
