Prepare Yourself for These Three Unanticipated Social Security Alterations in 2025
Social Security has been in the spotlight due to its financial instability and the possibility of reduction in benefits. Furthermore, during election periods, it's often a topic of discussion among politicians. You might've overlooked some recent changes announced for Social Security in 2025. Here are three key points to consider, whether you're a retired beneficiary or still in your career:
1. Benefits are escalating by 2.5%
Good news! Social Security is set to receive an annual cost-of-living adjustment in 2025.
The not-so-great news, however, is that the increase in benefits is only 2.5%. This is much smaller than the 3.2% increase recipients experienced at the beginning of 2024.
Unfortunately, the unfavorable news continues when it was announced that the cost of Medicare Part B would rise by $10.30 per month in 2025.
Given this increase in Medicare Part B, a 2.5% cost-of-living adjustment results in an average increase of around $49 per month for Social Security. However, the Medicare Part B premium hike cuts the increase down to approximately $39 per month, considering many Social Security recipients are also enrolled in Medicare.
2. There's increased flexibility to earn money from a job while receiving benefits
Delaying the claim of Social Security benefits until reaching the full retirement age offers a few benefits. If you were born in 1960 or later, this age is 67.
Waiting until full retirement age to collect benefits ensures that you won't face a reduction in your monthly payments. Additionally, you won't be affected by an earnings-test limit if you decide to continue working.
However, if you work and collect Social Security prior to reaching full retirement age, you'll face a risk of having some of your benefits withheld if your income exceeds a certain threshold. In 2025, this threshold, known as the earnings-test limit, is $23,400 - an increase of $1,080 from the 2024 limit ($22,320).
It's worth mentioning that the earnings-test limit is different for seniors who reach full retirement age during the year. In this case, the earnings-test limit is $62,160, an increase of $2,640 from the 2024 limit ($59,520).
3. High-earners are facing a larger Social Security tax bill
Social Security is primarily funded through payroll taxes, and higher-earning individuals pay more.
The Social Security Administration sets a wage cap each year, determining the income amount subject to taxes for funding purposes. In 2025, this cap is $176,100 - an increase of $7,500 from the 2024 limit ($168,600).
This change won't significantly impact most workers, but individuals whose income is high enough to feel a difference will experience an unwelcome update to the program.
Although the wage cap increase may increase your Social Security tax bill, remember that things could be worse. There may come a day when the Social Security wage cap is eliminated entirely, making all earnings subject to taxes to fund the program.
For now, high earners may want to appreciate the fact that only an additional $7,500 of their wages will be subject to Social Security taxes in 2025. Given the 12.4% Social Security tax rate, this corresponds to an additional $930 you'll pay. If you're a salaried worker, you'll split the additional cost with your employer, reducing the overall financial impact on you.
Lastly, keep in mind that the more you contribute to Social Security, the higher your monthly benefit. Preparing well for retirement is essential, but unfortunate circumstances may lead to you running out of funds. The guaranteed income provided by a larger monthly benefit adds an essential layer of protection in such challenging situations.
It's easy to focus on the possibility of benefit cuts, but it's important to stay aware of Social Security changes to avoid feeling surprised by them.
In light of the announced changes for Social Security in 2025, retirees might need to reassess their retirement budgets, as the cost-of-living adjustment for benefits is only 2.5%, which could result in a smaller increase in income than previously expected. Additionally, for individuals who are still working and collecting Social Security before reaching their full retirement age, it's crucial to be aware of the increase in the earnings-test limit from $22,320 in 2024 to $23,400 in 2025, which may impact their benefits if their income exceeds this threshold.
