Social Security is preparing for the new year, and as part of its preparations, the Social Security Administration (SSA) is unveiling some of the adjustments that will be implemented to ensure a smooth transition in 2025.
While the majority of the adjustments are beneficial and expected by beneficiaries of the SSA’s five programs, one of the rules on which many are waiting for an update will not alter this year.
In any event, beneficiaries must be aware of these developments and how they may impact them in the future. Here are the most significant adjustments that the SSA will make in 2025.
Social Security benefits are getting a 2.5% cost-of-living adjustment
Every year, beneficiaries receive a cost-of-living adjustment (COLA) to help them keep up with inflation. In 2025, the COLA will be 2.5%, and benefits will be increased by that amount. Seniors are especially concerned that this boost will not be sufficient to cover their bills, as 2024 has seen inflation soar above the COLA.
Many people are understandably concerned about the minimal rise. Despite the focus on lowering inflation, the average senior’s Social Security benefit will increase by nearly $49. If we exclude the previously mentioned $10 Medicare increase, they will have only $39 to cover their expenses.
The earnings-test limits are increasing
In better news for those who get Social Security payments while working, the earnings-test restrictions are being raised. This limit applies to beneficiaries who have not yet attained full retirement age (FRA) and are working. There are two limits: one for individuals who do not meet FRA by 2025 and one for those who do.
If you do not meet FRA, the earnings-test maximum in 2025 is $23,400, and after that amount, $1 in Social Security payments is withheld for every $2 in earnings.
If you reach FRA in 2025, the earnings-test maximum is $62,160, after which $1 in Social Security payments is withheld for every $3 in earnings.
The wage cap is rising
Because Social Security is not eternally scalable, politicians opted to cap payroll taxes for Social Security. In 2025, the Social Security pay maximum is $176,100, up from $168,600 in 2024. This is to ensure that taxes rise in tandem with wages while not penalizing individuals whose salaries only increase with the COLA.
The new cap will add $930 in taxes to new earnings who fall below the threshold, although as is customary, this will be divided evenly between employers. Self-employed people will have to pay it in full.
The threshold for taxes on benefits is not changing
Contrary to popular belief, Social Security benefits are not taxed separately. Beneficiaries are taxed on their combined income, which includes 50% of their yearly Social Security benefit as well as other taxable and nontaxable interest income (such as municipal bond payments).
This is good news for many beneficiaries, who rely heavily on Social Security payments and do not have enough combined income to pay taxes. Approximately 40% of beneficiaries pay taxes on their benefits. Having said that, the combined income thresholds were set decades ago and have not been revised, so more recipients are paying these taxes each year.
Individual tax filers must pay Social Security taxes if their combined income exceeds $25,000. For married couples filing jointly, the cap increases to $32,000. Updating these requirements would allow many recipients who are struggling to make ends meet to live more comfortably, but men have made no steps to do so.