As the 2024 election draws near, much attention is focused on the potential influence of presidential candidates on Social Security. However, regardless of the election’s outcome, several significant changes to Social Security are already scheduled for 2025. These changes will affect retirees, workers, and higher-income earners, making it essential for individuals to plan ahead. Here are five key areas where changes will occur.
Retirees’ Payments
One of the most anticipated changes for 2025 is the increase in Social Security payments for retirees, thanks to the Cost of Living Adjustment (COLA). COLA is designed to help retirees maintain their purchasing power by adjusting benefits based on inflation.
The amount of the COLA is determined by a formula that tracks changes in a specific consumer price index, which measures inflation. Analysts currently estimate that the COLA for 2025 could be around 2.6%, though the exact figure will be confirmed in October, based on data from the third quarter.
This adjustment is particularly important as it helps retirees keep pace with the rising costs of goods and services, ensuring that their fixed incomes remain sufficient to cover their daily needs.
Work Credits
Social Security benefits are earned through work credits, which are accumulated by earning wages and paying Social Security taxes. To qualify for benefits, an individual needs to earn 40 work credits, with a maximum of four credits available each year.
In 2024, the income required to earn one work credit is $1,730, meaning that earning $6,920 in the year would secure all four credits. This threshold is adjusted annually to reflect wage growth, ensuring that the value of work credits keeps pace with rising wages. In 2025, this income threshold is expected to increase, which is important for lower-income workers who need to track these adjustments closely. Failing to accumulate the necessary 40 work credits could result in ineligibility for benefits at retirement age.
Earnings Limits
For individuals who have not yet reached full retirement age, earning above a certain threshold can result in a reduction of Social Security benefits. Although these reduced benefits are later recalculated and restored upon reaching full retirement age, the immediate impact can be significant.
The earnings threshold that triggers a reduction in benefits is adjusted annually based on inflation. In 2024, this limit is set at $22,320. The threshold for 2025 is expected to increase, allowing individuals to earn more without impacting their benefits. This adjustment is particularly beneficial for those who wish to continue working while drawing benefits from the program.
Full Retirement Age
Another important change in 2025 will affect the age at which individuals can claim full Social Security benefits without penalties. In 2024, those turning 66 can claim full benefits at 66 years and 8 months. However, for individuals reaching 66 in 2025, the full retirement age will shift to 66 years and 10 months.
This gradual increase in the full retirement age was set in motion by legislation passed in 1983, which aimed to address Social Security’s financial challenges by incrementally raising the retirement age over time. Claiming benefits before reaching this new full retirement age will result in penalties, reducing the monthly amount of benefits received.
Social Security Tax Cap
Higher-income earners will see a change in the amount of income subject to Social Security taxes in 2025. Social Security taxes are only levied on income up to a certain cap, which is adjusted annually to reflect inflation. In 2024, the cap is set at $168,600. This cap will rise in 2025, meaning that more of an individual’s income will be subject to Social Security taxes if they earn above the new threshold.
Planning Ahead
These upcoming changes, driven by inflation adjustments and long-standing legislative measures, will impact seniors and future retirees regardless of the outcome of the 2024 election. Therefore, it is important for individuals to plan ahead for these adjustments, ensuring they understand how their benefits might be affected and taking steps to secure their financial future.
FAQs
What is the expected COLA for Social Security in 2025?
The estimated COLA is around 2.6%, pending final confirmation.
How many work credits are needed to qualify for Social Security benefits?
An individual needs 40 work credits to qualify.
Will the earnings limit for Social Security increase in 2025?
Yes, the earnings threshold is expected to rise.
What is the full retirement age for those turning 66 in 2025?
It will be 66 years and 10 months.
What will the Social Security tax cap be in 2025?
The cap will increase, affecting higher-income earners.
