More than 50 million retired workers received a Social Security benefit in April 2024. These monthly disbursements often constitute their largest source of income. A recent Gallup survey revealed that 88% of retirees depend on Social Security to some degree, with 60% stating that benefits are a “major source” of income.
The Social Security program
undergoes annual adjustments to keep benefits aligned with inflation and general wage levels. Given the significant role these benefits play in retirement, it is crucial for beneficiaries (and soon-to-be beneficiaries) to stay informed. However, a recent survey by the Nationwide Retirement Institute indicates that many Americans misunderstand basic aspects of the program.
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The Nationwide Retirement Institute recently reported that 70% of surveyed adults incorrectly agreed with the statement: “Social Security is not protected against inflation.” In reality, Social Security benefits will receive a cost-of-living adjustment (COLA) in 2025, ensuring that beneficiaries’ purchasing power is maintained despite rising prices.
Staying informed about these changes is essential for those who rely on Social Security. By understanding the adjustments and their implications, beneficiaries can better plan for their financial future.
Contrary to popular belief, Social Security payments do receive an annual cost-of-living adjustment (COLA) to maintain the purchasing power of benefits.
Understanding the Cost-of-Living Adjustment (COLA)
The COLA applied to Social Security benefits each year is determined by changes in a specific subset of the Consumer Price Index (CPI) during the third quarter of the previous year. This period spans from July to September. Consequently, the Social Security Administration (SSA) cannot finalize the official COLA for 2025 until the CPI data for September is released in mid-October.
Predictions for the 2025 COLA
Based on current consumer pricing trends, The Senior Citizen League, a nonprofit senior advocacy group, estimates that benefits will increase by 2.7% in 2025. However, due to higher-than-expected inflation in recent months, the group has adjusted its forecast multiple times, suggesting that the official 2025 COLA could potentially be even higher.
Key Points to Remember Cost-of-Living Adjustment
- Annual Adjustments: Social Security payments are adjusted annually to account for changes in the cost of living.
- Determining Period: The adjustment is based on CPI data from the third quarter of the previous year.
- Current Estimates: The Senior Citizen League currently predicts a 2.7% increase in 2025, but this is subject to change based on inflation trends.
Stay tuned for the official announcement from the SSA in mid-October to see the finalized COLA for 2025.
Exciting changes are on the horizon for Social Security benefits and taxes in the coming year. Here’s what you need to know to stay informed and prepared.
Increase in Social Security Benefits
Assuming a 2.7% COLA (Cost of Living Adjustment) for Social Security benefits next year, retired workers can look forward to an average monthly benefit increase of approximately $51. This will bring the total monthly benefit to about $1,967.
Changes in Social Security Taxes for 2025
Some workers will see more Social Security taxes withheld from their paychecks in 2025. According to Nationwide, a significant 74% of surveyed adults mistakenly believe that workers pay Social Security taxes on all of their income. This is not the case.
Understanding the Income Cap
Under current law, there is a cap on the income subject to Social Security payroll tax. For 2024, the maximum taxable earnings limit is set at $168,600. This means any income above this amount is not subject to Social Security taxation.
Annual Adjustments
The maximum taxable earnings limit is adjusted annually based on changes in the national average wage index. Although the official limit for 2025 will be published in mid-October, the Social Security Board of Trustees estimates that the taxable maximum will rise to $174,900 next year.
Stay tuned for further updates and ensure you’re well-prepared for these upcoming changes in Social Security benefits and taxes.
In 2025, workers are expected to see an increase in Social Security taxes by up to $391. This change will impact many individuals, especially those with higher incomes. Let’s delve deeper into what this means for you.
Understanding the Tax Rate Increase
Currently, the Social Security tax rate stands at 6.2%. For a worker with an income exceeding $174,900, this means they will have $10,844 withheld from their paychecks next year. In contrast, this year, the same worker will only have $10,453 withheld. The difference is a noticeable $391.
Impact on Social Security Recipients
Aside from the tax increase, there’s another crucial aspect to consider for Social Security recipients. A significant number of adults are unaware of specific rules that could affect their benefits.
Withholding of Benefits for Some Recipients
According to Nationwide, 46% of surveyed adults incorrectly disagreed with the statement: “Some of your benefits may be withheld if you’re still working before your full retirement age.” However, this statement is indeed true.
- Workers receiving Social Security benefits
- Under full retirement age
- Earnings exceed thresholds known as the retirement earnings test exempt amounts
If you fall into these categories, be prepared for the possibility that some of your benefits could be temporarily withheld.
Understanding these changes can help you better plan for the future and ensure you’re well-prepared for any financial adjustments. Stay informed and take the necessary steps to manage your finances effectively.
Understanding the retirement earnings limits is crucial for those approaching their full retirement age or already receiving Social Security benefits. These limits determine how much you can earn before your benefits are reduced.
Current Retirement Earnings Limits
As of now, there are two significant thresholds for beneficiaries:
- Lower limit: $22,320
- Upper limit: $59,520
For beneficiaries under full retirement age in 2024, $1 in benefits will be withheld for every $2 earned above the lower limit. In contrast, those reaching full retirement age in 2024 will see $1 in benefits withheld for every $3 earned over the upper limit.
Looking Ahead to 2025
The Social Security Board of Trustees will calculate the official retirement earnings test exempt amounts for 2025 based on changes in the national average wage index. These amounts will be published in mid-October. However, preliminary estimates suggest the following:
- Lower limit: $23,280
- Upper limit: $61,800
Understanding these thresholds can help you plan your earnings and retirement benefits more effectively. Stay informed and make strategic decisions to maximize your Social Security benefits.
Starting next year, beneficiaries under full retirement age will be able to earn more income before their benefits are withheld. This change provides greater financial flexibility for those who have not yet reached full retirement age.