Upcoming Significant Alterations in Social Security Scheduled for 2025: Crucial Insights for All
Time's running out for Washington politicians to implement significant changes in the Social Security system. According to the Social Security Board of Trustees, if no reforms are made, the fund is projected to exhaust its resources by 2033, leaving only 79% of benefits owed to retirees covered due to ongoing outflows surpassing inflows.
Although major overhauls are yet to be implemented, a few significant changes are on the horizon in 2025. These amendments can impact both retirees and those still actively working, as well as those already collecting Social Security benefits and those still several years away from applying.
1. Cost-of-living adjustments
Seniors receiving Social Security benefits enjoy annual increases called cost-of-living adjustments (COLAs). The 2025 COLA of 2.5% was announced in October and will take effect in January.
The COLA calculation is based on a segment of the Consumer Price Index (CPI-W), which monitors a selection of goods typically purchased by urban wage earners or clerical workers. Each year, Social Security Administration calculates the annual increase in the average CPI-W reading for the third quarter, which becomes the COLA for the coming year.
It's worth noting that the COLA affects retirees age 62 or older, regardless of whether they are collecting benefits. Those already receiving benefits will notice a 2.5% increase to their monthly payment starting from January. Those yet to claim benefits will witness a 2.5% boost in potential benefits, in addition to the increase for deferring retirement benefits if they are not yet 70 years old.
2. Increased Social Security tax for high earners
High earners might see an increase in their Social Security tax withholdings as of January. This rise in taxes is due to the annual adjustment of the wage cap subject to Social Security tax.
The wage cap limit for 2025 is $176,100—an increase from $168,600 in 2024. This means that anyone earning more than the 2025 cap will have $465 less in their total pay packet in 2025, equating to around $17.88 less per biweekly paycheck.
The increase in the wage cap surpassing the COLA is due to the Social Security Administration's use of average wage data to calculate changes in the taxable limit. The difference is a consequence of the average standard of living improving, with wage growth outpacing price increases. The agency employs similar data to adjust your earnings record for inflation before ascribing your retirement benefit.
3. Enhanced earnings potential while collecting benefits
If you continue working in your early 60s while receiving Social Security benefits, you might unintentionally reduce your monthly check. This is due to the Social Security earnings test, which may deduct $1 from benefits for every $2 earned in excess of a certain threshold. (The threshold increases closer to your full retirement age, and the deduction decreases to $1 for every $3 above the cap.)
For 2025, you can earn wage income of up to $23,400 before seeing a reduction in benefits ($62,160 in the year you reach full retirement age). This limit has been increased from $22,320 ($59,520) in 2024.
If your benefits are reduced due to the earnings test, take comfort in knowing that the funds are not permanently lost. Instead, the Social Security Administration will adjust your benefit upon reaching full retirement age to account for the foregone payments. If your benefits are reduced by the equivalent of six months' worth of payments, for example, it will be as if you deferred claiming benefits by an additional six months from your original claim date once you reach full retirement age.
The earnings test can be disadvantageous for retirees who rely on Social Security alongside their employment income to get by in their early 60s. However, some may view it as an advantage if they can eventually maximize their benefits by returning to work during their working years. Whether it proves beneficial or detrimental, it's crucial to be aware of this rule if you plan to keep working after claiming Social Security.
- While managing their retirement finances, retirees should consider the impact of the 2.5% cost-of-living adjustment (COLA) on their monthly Social Security income, which will increase their benefits starting from January 2025.
- Individuals earning over $176,100 in 2025 are expected to pay more in Social Security taxes due to the annual adjustment of the wage cap, which may lead to a decrease in their take-home pay, affecting their overall retirement finance planning.
