As we move towards 2025, it’s essential to stay informed about significant changes in the U.S. Social Security system, especially for the over 50 million retired workers who rely on these benefits as their main source of income.
Recent studies, including one by Gallup, reveal that a large majority of retirees depend on Social Security to some extent, with many relying on it as their primary economic support.
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Adjusting Social Security Benefits for Cost of Living
One of the most notable changes for the coming year is the cost-of-living adjustment, known as COLA. This adjustment directly responds to inflation and aims to preserve the purchasing power of benefits received by retirees.
Contrary to the misconception held by 70% of adults surveyed by the Nationwide Retirement Institute, who believed that “Social Security is not protected against inflation,” these benefits indeed have an annual adjustment mechanism.
The COLA determination is based on changes in the Consumer Price Index (CPI) during the third quarter of the previous year. This means that data from July to September are crucial for setting this adjustment. Although the official COLA for 2025 won’t be established until the September CPI data is released in October, current estimates from the Senior Citizen League suggest an approximate 2.7% increase in benefits.
However, due to higher-than-expected inflation in recent months, this percentage could rise.
Assuming the 2.7% increase is confirmed, this would mean the average monthly benefit for retired workers would increase by about $51, bringing the total to $1,967 per month.
Changes in Social Security Tax Withholding
Another significant change in 2025 will affect some workers who will see an increase in Social Security tax withholding from their paychecks.
A key fact many are unaware of—74% of respondents in a Nationwide survey believed otherwise—is that not all income is subject to these taxes. The current law sets a maximum taxable income limit, which is $168,600 for 2024.
This means any income above this amount is not subject to Social Security withholding. This limit adjusts annually based on changes in the national average wage index.
For 2025, the maximum taxable limit is expected to rise to $174,900. Workers earning above this new limit could end up paying up to $391 more in Social Security taxes compared to the previous year.
Withholding on Benefits for Active Workers
Regarding benefit withholdings, it’s crucial to note that workers who remain active and have not reached full retirement age might have a portion of their benefits withheld if their earnings exceed certain thresholds.
Currently, these thresholds are set at $22,320 for the lower limit and $59,520 for the upper limit. This means that, for example, a beneficiary under full retirement age in 2024 would have $1 withheld for every $2 that exceeds the lower limit.
For 2025, these thresholds are expected to increase to $23,280 for the lower limit and $61,800 for the upper limit, allowing beneficiaries under full retirement age to earn more before withholdings apply. It’s important to remember that once full retirement age is reached, these thresholds no longer apply, and any previously withheld benefits begin to be gradually reimbursed.
Staying informed about these changes is crucial not only for proper retirement planning but also to better understand how inflation and other economic variables can impact Social Security benefits. As we approach 2025, it is advisable for both current and future beneficiaries to review these changes and consider how they might affect their financial situation.
Social Security remains a fundamental pillar for millions of retirees in the United States, and understanding its dynamics is essential for ensuring a secure and stable retirement.