5 Major Social Security Changes Coming in 2025 That Could Surprise Many Retirees
Social Security benefits play a critical role in the retirement income of millions of Americans, particularly those from modest backgrounds or with limited other sources of income. Social Security can be the primary source of income for many, especially individuals with disabilities. With the Social Security Administration (SSA) announcing five major changes for 2025, these updates could significantly impact over 70 million beneficiaries across the country. This is especially crucial for retirees 65 and older, with 12% of men and 15% of women depending on these benefits for at least 90% of their income.
This article will break down these changes and explain how they might affect your retirement plans so you can stay informed and prepared. It is also advised to consult a financial advisor who can guide you through these Social Security changes coming ahead and ensure you are ready for them.
Below are five Social Security changes to look out for in 2025:
1. Social Security checks will get a 2.5% Cost-Of-Living Adjustment (COLA) hike
In 2025, Social Security beneficiaries will see a 2.5% increase in their benefits, thanks to the annual Cost-Of-Living Adjustment (COLA). While this increase might seem small compared to recent years, it is essential to understand how COLAs work and why they are critical for retirees’ dependent on Social Security. The COLA ensures that Social Security benefits increase with a rise in inflation. As inflation rises, the value of your Social Security checks can decrease. COLA ensures that you can maintain your purchasing power over time and use your checks effectively to cover your essentials in retirement. Each year, the SSA calculates the COLA based on changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). This index measures price changes for everyday goods and services in the country. As per the announcement by the SSA in October 2024, starting in 2025, the COLA will be set at 2.5% for the following year. The SSA has fixed the COLA at 2.5% based on the average CPI-W for the third quarter of 2024, which was 308.729. In comparison, the average CPI-W for the third quarter of 2023 was 301.236. The difference between these two figures has resulted in 2.5% COLA for 2025.
Thanks to this COLA boost, the average monthly Social Security benefit for retirees will rise from $1,927 to $1,976. This can result in an additional $49 per month or $588 for the entire year. It is important to note that COLA increases apply to all beneficiaries, including those collecting Social Security benefits due to disability or as survivors of covered workers, such as spouses. While any increase is good news, especially in a time of rising living costs, it is worth noting that the 2025 COLA is smaller than the 3.2% increase in 2024 and significantly lower than the 8.7% boost in 2023. In fact, the 2025 adjustment marks the lowest increase since 2021, when benefits went up by 5.8%. However, if you look at the cumulative total of these increases over the past four years, beneficiaries have seen a total COLA of 20.3%.
Even with this positive change in Social Security checks, many retirees are still likely to struggle with inflation. Since 2000, Social Security benefits have lost 36% of their buying power, according to a report published by the Senior Citizens League. So, to keep up with rising costs, recipients would need an additional $516.70 every month just to maintain the same standard of living they had back in 2000. If you are relying on Social Security as your primary source of income, the 2025 increase might not be enough to cover the rising costs of healthcare, housing, transport, utilities, and other essential expenses. It is important to discuss this with a financial advisor to ensure you have other retirement savings to rely on.
2. Increase in the maximum Social Security benefit for new retirees
For those retiring in 2025, the maximum Social Security benefit will increase. Currently, the maximum monthly benefit for newly awarded retirees is $4,873, as of 2024. However, in 2025, this will rise to $5,108 per month. This is an increase of approximately 4.82% from 2024 to 2025 and can help retirees be more financially secure.
3. Changes in the payroll tax limit from $168,600 to $176,100
In 2025, workers will see an increase in the amount of income subject to Social Security taxes. While Social Security taxes are often confused with federal and state income taxes, they are separate. Unlike federal taxes, which apply to all types of income, Social Security taxes are only applied to a certain amount of earnings each year. For 2025, that cap is set at $176,100, up from $168,600 in 2024. Starting in 2025, workers will pay Social Security taxes on income up to $176,100, and any earnings above that amount will not be subject to the Social Security portion of payroll taxes.
The Social Security payroll tax rate remains at 12.4%. This is divided equally between employees and employers, with each paying 6.2%. However, self-employed individuals are required to pay both the employer and employee portions, which results in a total of 12.4% tax on their earnings. For workers earning the maximum taxable amount, this translates to a maximum Social Security tax of $10,918.20 in 2025, up from $10,452.60 in 2024. It is also important to note that while the Social Security tax is capped at $176,100 for 2025, the Medicare portion of payroll taxes has no such limit. Workers will pay a 1.45% Medicare tax on all their earnings, with employers matching that contribution. Self-employed workers are again responsible for both sides, and they will pay a combined 2.9% in Medicare taxes. This makes the total payroll tax for self-employed individuals 15.3% when you combine Social Security and Medicare. For higher earners, the absence of a cap on Medicare taxes will result in their total tax burden continuing to grow with their income. For self-employed individuals, this can be a significant expense, as they will bear the full responsibility for both Social Security and Medicare taxes.
While this increase means higher taxes for higher-income earners, it also comes with the potential for higher benefits down the line. So, while higher-income workers will be contributing more to taxes, they will also be eligible for larger benefits when they retire. Nevertheless, there are some ways to reduce the impact for those concerned about paying more in taxes. For instance, you can contribute more to tax-advantaged retirement accounts like traditional Individual Retirement Accounts (IRAs) or 401(k)s. Contributions to these accounts are tax-deductible, which can lower your taxable income for the year. Another thing to note is that while the new Social Security increase in the payroll tax will have a noticeable impact on workers’ take-home pay, it will also help the SSA fund the Social Security program. The SSA will be able to collect more funds, which can help the program sustain itself amidst the growing concerns about it drying up in the future. However, it is still essential for you to plan ahead, particularly if you fall into the self-employed or high-income earner category. You can consult with a financial advisor for help and guidance on how to manage the higher taxes as per your financial situation and overall taxable income for the year.
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4. Increase in the cost of a quarter of coverage from $1,730 to $1,810
Another significant Social Security change for 2025 is the increase in the cost of earning a Social Security credit, also known as a quarter of coverage. Workers need to accumulate at least 40 credits throughout their working years to qualify for retirement benefits. You can earn a maximum of four credits each year, which makes it crucial to keep track of your earnings to ensure you are eligible for Social Security benefits. In 2025, the earnings required to earn one Social Security credit will rise to $1,810, up from $1,730 in 2024. This 4.6% increase may seem small, but for individuals who rely on part-time work, this change could make a noticeable difference in their ability to qualify for benefits. The increase is based on the national average wage index, which adjusts annually to reflect the wage growth across the U.S. economy. The SSA calculates this by multiplying the 1978 baseline of $250 by the ratio of the 2023 average wage index to that of 1976. The result is then rounded to the nearest $10, which for 2025 is $1,810.
So, if workers require one credit, they will need to make at least $1,810 in 2025. To earn the maximum four credits for the year, a worker would need to earn at least $7,240 in total. This is an increase from the $6,920 required in 2024. For many full-time workers, this change might not have a huge impact, but for those working part-time or who have fluctuating incomes, it is essential to pay attention to these numbers. If you do not meet the new earning thresholds, you will not earn all four credits for the year, which would not qualify you for Social Security benefits down the line. Missing even one year of credits can push back the timeline for receiving full benefits, which is why tracking your earnings and planning ahead are so important. This is especially critical if you are nearing retirement. You need a total of 40 accumulated full credits to qualify for the benefits. So, each year counts, and even one year of lapse can set you behind in retirement planning.
5. Change in Social Security earnings test
For 2025, the earnings test thresholds are also increasing, which will impact how much you are allowed to make on Social Security without affecting your benefits. The earnings test applies to people between the ages of 62 and their Full Retirement Age (FRA), which ranges between 66 and 67, depending on your birth year. If you start collecting benefits before reaching FRA and continue to work, the SSA imposes these limits to reduce your benefits accordingly. You do not lose the withheld benefits. Once you reach FRA, your monthly benefits will be recalculated, and the SSA will gradually return the withheld amount by increasing your benefit payments over time. However, this can be a problem for the years you receive a lower Social Security check, and you must understand the total impact of choosing to work while collecting your Social Security benefits.
If you are under FRA throughout the year, you can earn up to $23,400 annually or $1,950 per month before any of your Social Security benefits are reduced. This is an increase from the 2024 earnings limit of $22,320, or $1,860 per month. For any earnings above the threshold, the SSA will withhold $1 in benefits for every $2 you earn. For example, if you earn $25,400 in 2025, that is $2,000 over the earnings limit. The SSA would withhold $1,000 of your Social Security benefits for the year. If you reach FRA in 2025, the earnings test limit is much higher. In this case, you can earn up to $60,160 annually or $5,180 per month before any reduction in your benefits. This is up from $59,520 annually, or $4,960 per month, in 2024. If your income exceeds this limit, the SSA will withhold $1 for every $3 you earn over the threshold. Keep in mind, however, that this only applies to earnings up until the month before you reach FRA and not the entire year. For example, if you reach FRA in October 2025 and have earned $62,160 by September, the SSA will withhold a portion of your benefits for that year. Once you reach the FRA, there is no limit on earnings, and any benefits that were previously withheld will be repaid to you over time.
The increase in the earnings test thresholds for 2025 increases the maximum amount you can earn while on Social Security without impacting your benefits. It can help you if you wish to continue working in retirement. You can earn a relatively higher income without reducing your benefits. For example, in 2024, you can only earn up to $22,320 without facing a reduction in your benefits. In 2025, that limit rises to $23,400, allowing you to earn an extra $1,080 before the reductions are applied. The difference is even more significant for people nearing FRA as the limit rises from $59,520 in 2024 to $60,160 in 2025.
To conclude
These new Social Security changes coming in 2025 will have varying impacts on different people, depending on their personal circumstances. While some changes are beneficial, others may raise concerns for certain individuals. It is crucial to understand how these adjustments affect you specifically. Make sure you are informed and aware of the changes so you can avoid miscalculating your retirement needs. This can help you ensure that your Social Security withdrawals are planned in a way that maximizes your benefits.
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