As 2024 draws closer to its end, preparing for notable Social Security changes is crucial. For retirees and those receiving disability benefits, several modifications will impact your benefits in 2025. For Social Security beneficiaries, the 2025 COLA may be lower than in recent years, and the Social Security tax may be higher for higher earners.
Changes to be made in the Social Security system in 2025
In just four months, changes are expected to influence millions of Americans, particularly higher earners and those relying on Social Security. The program adapts each year to account for inflation, wage growth, and other economic factors, but 2025 brings a few substantial updates that may require careful financial planning.
- Higher Earners Will See a Greater Impact on Taxes
The payroll tax, which funds Social Security, has a wage cap that limits how much income is subject to taxation. For 2024, the wage cap stands at $168,600, meaning any income beyond this limit is exempt from Social Security taxes. However, with wage growth and inflation continuing to rise, this cap is expected to increase in 2025. Higher earners will have to pay more Social Security taxes as the wage cap adjusts, although the exact new limit will be revealed later.
If you are a high-income earner, now is the time to consult with a financial advisor or accountant to explore tax-saving strategies. Options may include maxing out retirement contributions or offsetting income with investment losses. Being proactive will help you mitigate the effects of these upcoming tax increases.
- Tougher eligibility for Social Security benefits
Eligibility for Social Security retirement benefits doesn’t simply come with age. You need to accumulate 40 work credits over your lifetime, with a maximum of four credits per year. In 2024, one work credit is worth $1,730 in earnings, but this threshold will rise in 2025.
If you are a part-time worker, you might need to increase your hours to meet the new credit requirements. While this change will primarily affect part-timers, full-time workers earning minimum wage will likely still accumulate the four credits needed each year. It’s important to stay aware of these adjustments, as they could impact your ability to claim benefits when you retire.
- Lower-than-expected cost-of-living adjustments (COLA)
Social Security recipients receive annual cost-of-living adjustments (COLA) to maintain purchasing power as inflation rises. For 2024, the COLA was 3.2%, a significant decrease from the 8.7% bump in 2023. The adjustment for 2025 is currently estimated at 2.63%, reflecting lower inflation rates in 2024.
This reduction in COLA may come as a disappointment to beneficiaries, particularly those on fixed incomes. It’s essential to anticipate this modest increase in monthly benefits and adjust your budget accordingly. For example, you might consider cutting unnecessary expenses or finding additional income through part-time work or gig economy opportunities.
