In April, nearly 51 million retired worker beneficiaries took home an average Social Security check of $1,915.26, which amounts to nearly $23,000 over an entire year. While this may not sound like a lot of money, Social Security has played a key role in strengthening retirees’ financial foundations and helping them pay their bills.
More than two decades of annual Gallup research has found that between 80% and 90% of then-retirees consistently rely on their Social Security income to cover at least some of their expenses. This means that the annual changes that may occur in America’s top pension program are of paramount importance to current and future beneficiaries.
Although the Social Security Administration (SSA) won’t announce any concrete adjustments until the second week of October, beneficiaries can expect six changes in 2025.
1. Social Security’s cost-of-living adjustment (COLA) should modestly increase benefits
The undisputed most anticipated “change” to Social Security each year is the Cost of Living Adjustment (COLA). The best way to think about COLA is as the mechanism used by the SSA to account for inflation. In other words, if the price of the goods and services seniors buy increases, Social Security checks should ideally increase by the same amount to avoid losing purchasing power. COLA is the tool that tackles this task.
Over the past three years, COLAs have been above the 20-year average of 2.6%. In 2022, 2023 and 2024, beneficiaries enjoyed respective increases in their Social Security checks of 5.9%, 8.7% and 3.2%. In 2025, this increase may be slightly more modest than in recent years.
Following the release of the April inflation report, nonpartisan advocacy group The Senior Citizens League slightly adjusted its long-term COLA forecast for 2025 from 2.6% (after the March report) to 2.66%. Because cost-of-living adjustments are rounded to the nearest tenth of a percent, a 2.7% COLA for the coming year would be just a hair above the 20-year average.
What would a 2.7% COLA actually mean for beneficiaries? Keeping in mind that we haven’t even reached the months that matter for the COLA calculation, an estimated 2.7% cost-of-living adjustment in 2025 would increase the average retired worker’s check by almost $ 52 per month increase. Meanwhile, workers with disabilities and survivors would see their monthly payouts increase by an estimated $42 and $41, respectively.
2. High income earners will almost certainly owe more payroll taxes
A second change that is likely to happen in 2025 is that high earners will open their wallets a little more widely.
In 2024, all earned income – wages and salaries, but not investment income – between $0.01 and $168,600 will be subject to Social Security’s 12.4% payroll tax. This tax generates more than 90% of the revenue the program collects and pays out to eligible beneficiaries. All wages and salaries earned above $168,600 (known as the maximum taxable income limit) are exempt from payroll taxes.
However, the maximum taxable income ceiling is adjusted to the National Average Wage Index (NAWI) in most years, with the only exception being the years in which there is no COLA and deflation occurs. With prices for goods and services rising, NAWI should increase in 2025 and raise the maximum taxable income ceiling above $168,600.
For the roughly 94% of working Americans who earn less than $168,600 and pay into Social Security with every dollar they earn, this change is a moot point. But for the 6% of high earners whose part of their income is exempt, this would mean that they would have to pay more payroll tax next year.
3. The maximum monthly Social Security benefit will likely increase again
Although high-income workers may owe more payroll taxes in 2025, high-income earners will also likely see their maximum monthly retirement benefit increase over their lifetime. Yesthere is a limit on how much the program will pay out in benefits at full retirement age.
In 2024, the maximum monthly payout for a worker retiring at full retirement age will be $3,822, which represents a jump of $195 from the 2023 level. While the increase in 2025 will likely be more modest, it should nonetheless must be higher than $3,822.
Only about 2% of retired worker beneficiaries qualify for this maximum benefit, and they must meet three criteria:
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Retirees must have worked for at least 35 years.
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Employees must have met or exceeded the maximum taxable income ceiling in all 35 years that the SSA uses to calculate their benefits.
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Retirees must wait until their full retirement age to claim their benefits.
4. The income thresholds for disabled people must be raised
In April, approximately 7.25 million workers received long-term disability benefits through Social Security. To maintain these benefits, employees with disabilities are only allowed to take home a certain amount of earned income each month.
By 2024, non-blind disabled workers can earn up to $1,550 a month without having their benefits cut off, which is $80 a month more than in 2023. Meanwhile, blind disabled workers can bring in $2,590 a month without having their benefits cut off — $130 a month more than in 2023.
With inflation slowing slightly from the previous year, the Social Security disability income threshold for non-blind beneficiaries could exceed $1,600 per month by 2025, while the threshold for blind beneficiaries could be near $2,700 per month. month could come.
5. Withholding tax thresholds are expected to increase for early filers
Workers with disabilities aren’t the only beneficiaries who may be able to keep more of their income next year without giving up all or part of their Social Security income.
Early filers, which include anyone currently receiving retirement benefits before reaching full retirement age, may be subject to a number of penalties. In addition to a permanent reduction in their monthly benefit of up to 30% depending on their year of birth and claim age, early filers may be exposed to the pension income test. Based on your earned income, the retirement income test allows the SSA to withhold some or all of your benefits.
Retirees who do not reach full retirement age this year (2024) can have $1 in benefits withheld for every $2 in earned income over $22,320, which amounts to $1,860/month. Meanwhile, beneficiaries of retired workers who reach full retirement age in the current year can receive $1 in benefits withheld by the SSA for every $3 of earned income above $59,520, or $4,960/month.
When prevailing inflation rises and Social Security beneficiaries receive a COLA, these early withholding thresholds rise. This means early filers should be able to keep more of their earnings next year without giving up some or all of their benefits.
Once an employee reaches full retirement age, the pension income test no longer applies.
6. Eligibility for Social Security benefits is likely to become increasingly difficult
Last but not least, it will almost certainly become increasingly difficult for workers to qualify for Social Security benefits next year.
Despite what you may have heard or read online, Social Security benefits are not something you get just because you were born or became a citizen in the United States. Benefits are traditionally earned through work credits. You need 40 of these lifetime work credits to qualify for retiree benefits, and no more than four credits can be earned annually.
The good news is that the bar is quite low to earn these credits. In 2024, one work credit equated to $1,730 in earned income. So if you generate $6,920 in wages and salaries this year ($1,730 times 4), you will have earned the maximum four lifetime credits for 2024. Expect this income threshold to qualify for benefits to increase modestly over the next year.
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6 Social Security Changes to Expect in 2025 was originally published by The Motley Fool
