As 2025 is just around the corner, people need to anticipate some upcoming changes as to how Social Security could impact their retirement planning.
It is best to note that these adjustments are not just for retirees alone. Workers that are currently working will need to stay informed as well. These changes affect the cost of living adjustments (COLA) as well as the shifts in the full retirement age (FRA) and changes in Social Security credits and taxes. Here’s what to expect in the new year.
1. Smaller cost of living adjustment (COLA) expected
The Social Security cost of living adjustment (COLA) for 2025 is projected by many experts to be smaller than in 2024. With the July inflation rate easing to 2.9%, it therefore marks the fourth consecutive month of decline. Due to this analysis, it is best to anticipate COLA for 2025 to be about 2.57%, which is a drop from 3.2% in 2024.
In some cases, a lower inflation rate might sound like good news, but it is best to understand that it does not reduce the already high costs of essential items such as groceries, utilities, and housing. Reports from the Kiplinger Inflation Outlook noted that in July grocery and energy prices remained relatively stable, and unchanged, as did housing costs, which are expected to ease, however, they have not decreased as much as anticipated.
Furthermore, the Social Security Administration (SSA) is using a three-month average of inflation data to finalize the COLA. The final decision will be announced in October. Until then, it is best for retirees to prepare for a modest increase in their Social Security checks in 2025.
2. Gradual Increase in Full Retirement Age (FRA)
2025 is going to be an interesting year that will see lots of changes in the social security area. Starting in 2025, there will be a change to the full retirement age (FRA); this will see another gradual increase.
Kindly note: For individuals who were born between 1955 and 1960, their FRA has been getting closer to age 67. However, in 2025, the FRA will now be 66 years and 10 months. This is going up from 66 years and eight months for those who just turned 66 in 2024.
Here’s a breakdown of the FRA based on birth year:
- Individuals born in 1958: FRA is 66 years and six months (reached in 2024).
- Individuals born in 1959: FRA is 66 years and 10 months (reached in 2025)
- The individual born in 1960 or later: FRA is 67 years
Keypoint: If you retire early, let’s assume that at the age of 62, your benefits will be reduced. The reduction is then calculated as 5/9 of 1% for each month before your FRA, up to 36 months.
What’s more? For additional months, the reduction will be 5/12 of 1% per month. It is best to note that a delay in your retirement beyond the FRA can increase your benefits by 8% per year until age 70.
3. Higher thresholds for Social Security credits and taxes
In 2025, you’ll need to be earning more to be eligible for Social Security credits; furthermore, the wage cap for Social Security taxes will also be on the rise.
For an individual to qualify for retirement benefits, the individual will need to earn about 40 work credits. In 2024, one credit requires about $1,730 in wages or self-employment income, which is a total of about $6,920 for four full credits. This amount will therefore increase in 2025; however, the exact figure is yet to be announced.
