Three Major Social Security Changes Coming in 2025 – How They Will Impact Retiree Paychecks

As 2024 progresses, many retirees and soon-to-be retirees are starting to pay closer attention to the changes that Social Security will implement in 2025. Social Security is a lifeline for over 55 million retired workers, providing an average benefit of $1,900 per month. However, this amount can fluctuate due to various adjustments made annually. Here’s a breakdown of the three major changes that will impact Social Security recipients in 2025 and how you can prepare.

Increased Taxes

Social Security is primarily funded through payroll taxes, but not all of an individual’s income is subject to these taxes. The Social Security tax is only applied up to a certain earnings limit, which is currently set at $168,600 for 2024. This means that if someone earns $200,000 annually, they only pay Social Security taxes on the first $168,600 of their income.

In 2025, this earnings limit is expected to increase, which means higher-income earners will contribute more to Social Security. This increase is designed to keep up with inflation and wage growth. If you’re a higher earner, this could affect your tax planning strategy. It might be wise to consult a CPA to investigate options for managing your tax liability, such as maximizing contributions to retirement accounts or strategically realizing investment losses to offset taxable income.

Eligibility

To qualify for Social Security retirement benefits, individuals need to accumulate 40 work credits over their lifetime, with a maximum of four credits earned per year. In 2024, one work credit is equivalent to $1,730 in earnings. This threshold is expected to rise in 2025, making it slightly more challenging to earn the necessary credits, particularly for part-time workers.

If you are working part-time and nearing retirement, consider increasing your work hours to ensure you meet the credit requirements. Full-time workers are unlikely to be affected, as even those earning minimum wage should easily qualify for four credits per year. Nevertheless, staying informed about these changes can help you make proactive decisions to secure your Social Security benefits.

Lower COLA

The Cost-of-Living Adjustment (COLA) is an annual increase in Social Security benefits designed to help recipients keep up with inflation. In recent years, COLA increases have been significant, with a 3.2% increase in 2024 and an 8.7% increase in 2023 due to high inflation. However, the COLA for 2025 is projected to be much smaller, around 2.63%.

While this is only an estimate, the final COLA percentage will be officially announced on October 10th, 2024, based on third-quarter inflation data. A lower COLA means that retirees may see a smaller increase in their monthly benefits, which could be concerning for those who rely heavily on Social Security as their primary source of income.

Given the likelihood of a smaller COLA increase, retirees should start considering how to adjust their budgets accordingly. This might involve cutting back on non-essential expenses, finding additional sources of income, or reassessing their financial plans for the future.

Preparing for 2025

As these changes approach, it’s crucial for retirees and those nearing retirement to stay informed and plan accordingly. The increase in Social Security taxes for higher earners, stricter eligibility requirements, and a likely lower COLA will all have an impact on your retirement income. Taking proactive steps now—such as consulting with a financial advisor, revising your budget, and investigating ways to maximize your benefits—can help ensure a smoother transition into these new regulations.

Social Security is a critical component of retirement planning, and knowing these upcoming changes will help you make informed decisions that protect your financial well-being.

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