Today marks the implementation of six significant modifications to Social Security:
Since its inception 85 years ago, Social Security has been a significant financial support system for elderly Americans who can no longer sustain themselves. According to the Center on Budget and Policy Priorities' analysis, this program prevents about 22.7 million people from living in poverty annually, out of which 16.5 million are senior adults aged 65 and above.
Despite its ongoing relevance for over eight decades, Social Security constantly evolves. With the arrival of a new year, six significant changes to this established program come into effect as of today.
1. Larger Social Security payments forthcoming
Every year, the most anticipated announcement regarding Social Security is its Cost of Living Adjustment (COLA). The COLA is a mechanism employed by the Social Security Administration (SSA) to offset the impact of inflation on beneficiaries. For instance, if the cost of a basket of commodities and services commonly purchased by retirees increases by 2%, 3%, or 5%, recipients' benefits should ideally rise by a corresponding amount to prevent a loss in purchasing power.
In the year 2025, Social Security checks will receive a 2.5% COLA, which is the smallest since 2019. However, it is still above the norm, as an average increase over the past 15 years has been around 2.3%. Consequently, the typical retired worker's monthly check would increment by approximately $49 to $1,976 in 2025. Similarly, the average monthly benefit checks for disabled workers and survivor beneficiaries are projected to climb by $38 to $1,580 and $1,551, respectively.
Although the four consecutive above-average COLAs may seem appealing, rising shelter and medical expenses, coupled with a surging Medicare Part B premium, can potentially hinder the purchasing power of a Social Security dollar.
2. Higher earners might have to pay more in taxes
A notable aspect of these changes is that they affect more than just current beneficiaries. The start of a new year can result in larger tax bills for high-income earners.
Social Security's primary funding source is the 12.4% payroll tax collected on earned income, including wages and salaries but excluding investment income. In 2024, earned income between $1 and $168,600 was subject to this tax.
From today, all earned income between $1 and $176,100 will be subject to the 12.4% payroll tax. This annual update to the maximum taxable earnings cap is typically due to a percentage increase in the National Average Wage Index. About 94% of workers earn less than this maximum taxable earnings limit, rendering them immune to this change. The remaining 6% of higher-income workers may expect an increase of up to $930 in their payroll tax liability if self-employed, or $465 if employed by someone else in the new year.
3. Enhanced maximum monthly benefit at full retirement age
While high-earners may have to pay more in taxes, high-earning retirees can expect a more substantial monthly benefit in 2025.
The maximum monthly benefit for a retiree at full retirement age was $3,822 in 2024. Full retirement age signifies the age at which a worker becomes entitled to receive 100% of their monthly benefit. In 2025, this maximum monthly benefit at full retirement age will rise by $196 to $4,018.
Only about 2% of beneficiaries attain this maximum monthly benefit from Social Security. The reason for this low figure stems from three requirements:
- A retired worker must wait until full retirement age to start receiving their benefit.
- Beneficiaries must have worked for at least 35 years, as the SSA considers their 35 highest-earning, inflation-adjusted years when determining benefits at full retirement age.
- Retired workers must have surpassed the maximum taxable earnings cap in all 35 years considered by the SSA when calculating their monthly benefit.
4. Earnings test withholding thresholds increase for early filers
The start of a new year also brings modifications to retirees who started collecting their Social Security checks before reaching full retirement age (early filers).
Social Security encourages retirees to wait before claiming their benefits with a financial incentive. For every year a worker delays claiming their payout, starting at 62, their monthly benefit can grow by up to 8%. However, for early filers at 62, they must accept a permanent reduction in their monthly payout of 25% to 30%, depending on their birth year.
Yet, this isn't the only penalty for early filers. The retirement earnings test allows the SSA to withhold some or all of an early filer's benefits depending on their income.
Early filers who didn't reach their full retirement age in 2024 had $1 in benefits withheld for every $2 in earned income above $22,320, which equates to $1,860 per month. In 2025, early filers who have not attained their full retirement age can earn up to $23,400 ($1,950 per month) without any withholding.
The retention limit varies significantly for employees who are anticipated to attain their complete retirement age by 2025. For this group, a dollar in benefits can be withheld for every three dollars in earnings income surpassing $62,160 ($5,180 per month) in the current year. This is an increase from $59,520 ($4,960 per month) in 2024.
When an employee reaches their complete retirement age, the retirement earnings test loses its applicability. Moreover, previously withheld benefits are compensated by increasing the monthly benefit once an employee reaches their complete retirement age.
5. The income thresholds for employees with disabilities are also rising
However, early filers are not the sole category of beneficiaries with changing income thresholds. The program's over 7.2 million workers with disabilities also have earnings limits they should keep in mind.
Last year, non-blind employees with disabilities could make up to $1,550 per month without having their payments halted by the SSA. In the new year, they'll be allowed to make $70 more per month, or $1,620, without having their disability benefits suspended.
This annual nominal-dollar increase is more marked for blind employees with disabilities. The ability to generate earnings without having Social Security disability benefits cease increases by $110 per month in the current year to $2,700 for blind employees with disabilities.
6. It will be slightly more challenging to qualify for a Social Security benefit
Lastly, it will be slightly more difficult for employees to qualify for Social Security coverage, which includes potential retirement, survivor, and disability benefits.
Contrary to popular belief, Social Security benefits are not inherent rights or guaranteed to American citizens. Benefits are typically earned through work, with a minimum of 40 lifetime work credits required to receive a retired-worker benefit. A maximum of four credits can be earned annually.
The positive aspect for working Americans, especially part-timers, is that the threshold to earn these valuable lifetime credits is relatively low. In 2024, it required $1,730 in earned income to earn one work credit. Therefore, $6,920 in earned income ($1,730 X 4) was sufficient to max out your work credits last year.
In the new year, it will require $1,810 in earned income to earn one lifetime work credit and $7,240 to collect the maximum of four work credits.
- Planning for retirement becomes even more crucial, as the increased maximum monthly benefit at full retirement age in 2025 might provide a better financial cushion for high-earning retirees, providing them with more 'money' to save or spend during their golden years.
- With the rise in the earnings test thresholds for early filers, some senior Americans who started collecting their 'Social Security' checks before reaching full retirement age may find themselves with less 'financial pressure' when it comes to their monthly benefits, as their income may not result in benefit deductions as often.
