As we move through 2024, it’s essential to begin planning for the financial changes expected in 2025, particularly for those who rely on Social Security.
Whether you’re retired or still in the workforce, understanding these annual adjustments is crucial, as they can significantly affect your financial situation. Looking ahead to 2025, here are three key Social Security changes that you should be aware of.
1. Lower COLA Increase Expected in 2025
Social Security benefits are adjusted annually through the cost-of-living adjustment (COLA) to help maintain purchasing power amid inflation. For instance, benefits saw a 3.2% increase at the start of 2024, following a substantial 8.7% adjustment in 2023 due to high inflation in 2022.
However, the COLA for 2025 is expected to be lower, with current estimates suggesting an increase of around 2.63%. While this is still an increase, it is significantly smaller than recent years. It’s important to note that this figure is not final, as the actual COLA will be based on inflation data from the third quarter of 2024. As we are just past July, the final adjustment could still change.
For those already receiving Social Security benefits, the projected 2.63% increase offers a preliminary glimpse of what to expect. If this potential increase doesn’t seem sufficient to meet your financial needs, now might be the time to explore additional income sources or reduce expenses.
2. Higher Social Security Taxes for High Earners
Social Security is largely funded by payroll taxes, but these taxes only apply to income up to a certain limit. For 2024, the wage cap is set at $168,600, meaning earnings above this amount are not subject to Social Security taxes.
For example, if someone earns $200,000 in 2024, the last $31,400 of their income will not be taxed for Social Security.
In 2025, this earnings cap is expected to rise, as it typically does each year to keep up with inflation and wage growth. As a result, higher earners may pay more into Social Security next year. Although the exact cap for 2025 hasn’t been announced yet, those likely to be affected should start planning now.
If you’re a high earner, consulting with a tax professional might be wise. There are strategies available, such as maximizing retirement plan contributions or realizing investment losses, that can help reduce your taxable income.
3. Stricter Qualification Criteria for Social Security
Qualifying for Social Security benefits requires more than just reaching a certain age; you must earn 40 work credits over your lifetime, with a maximum of four credits per year. In 2024, each credit is earned by making $1,730 in earnings, meaning you must earn at least that amount to gain a credit.
In 2025, the threshold for earning a work credit is expected to increase. This change could make it more challenging for part-time workers who aim to qualify for Social Security benefits, as they may need to work more hours to accumulate the necessary credits.
Full-time workers are less likely to be affected by this change, as even a minimum wage job should still allow them to earn the maximum four credits in 2025, regardless of any increase in the threshold.
Conclusion
As we approach 2025, these upcoming changes to Social Security will have varying impacts on retirees and workers. While the expected COLA increase is lower than in recent years, higher earners may face increased taxes, and stricter qualification criteria could make it harder for part-time workers to earn benefits.
Staying informed and planning accordingly can help you navigate these changes and ensure that you are financially prepared for the future.
Q1. What is the expected COLA increase for Social Security in 2025?
A. The COLA increase for 2025 is estimated to be around 2.63%, though this figure could change based on inflation data later in the year.
Q2. How will higher earners be affected by Social Security changes in 2025?
A. Higher earners may pay more in Social Security taxes due to an expected increase in the wage cap for taxable income.
Q3. What is the new threshold for earning Social Security work credits in 2025?
A. The exact threshold hasn’t been announced yet, but it is expected to increase, making it potentially harder for part-time workers to earn credits.
Q4. How does the COLA adjustment impact Social Security benefits?
A. The COLA adjustment helps Social Security benefits keep pace with inflation, though the expected increase for 2025 may not fully cover rising costs for retirees.
Q5. Can part-time workers still qualify for Social Security benefits in 2025?
A. Yes, but part-time workers may need to increase their hours to meet the higher threshold for earning work credits.
