Change is unavoidable, particularly when it comes to Social Security. Every year, the program is revised to ensure that beneficiaries receive the best available care while also keeping the system up to current with societal trends. Knowing these developments is critical for new retirees, so if you’re retiring in 2025, here are some things to keep in mind.
How Your Social Security Benefits Are Determined
Most people are aware of this, but in case you are not, Social Security payments are calculated using your records from your 35 greatest earning years. When you work, you must pay payroll taxes to the Social Security Administration (SSA). Your benefit will be computed based on how much you paid in taxes, which is equivalent to how much you earned.
This is why it is critical that you notify the Social Security Administration of any changes in your employment or earnings. Check your “my social Security account” if you have one, or create one if you don’t, and make sure the information the SSA has about you is right, as it’s quicker to change a record as it happens rather than waiting years.
Full Retirement Age
According to the Social Security Administration (SSA), “full retirement age (FRA) is the age at which you are entitled to your full monthly payment based on your career earnings record.” This age fluctuates depending on your year of birth and has been altered over the years to increase from 65 to the present 67.
Having said that, waiting until you reach 70 to claim benefits would most likely work in your advantage because this is the age at which you can obtain the maximum benefit.
Cost-of-Living Adjustment
Despite being labeled as fixed income, Social Security recipients get annual cost-of-living adjustments (COLAs) to account for inflation. In 2025, the COLA will be 2.5%, increasing the average retirement check by $48 a month.
The COLA is determined using a formula that includes third-quarter inflation statistics from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). There have been proposals to modify the CPI used for the CPI-E, which skews the data for individuals over 62 by giving more weight to areas such as healthcare, but this has yet to be adopted.
Income Taxes on Benefits
Most states do not tax Social Security benefits, but federal taxes still apply to around 40% of beneficiaries, according to the SSA. This is because, while Social Security income is not taxed, many people have other sources of income, such as retirement funds or passive income, which means they are subject to federal taxes.
Individuals who file as single and have not attained FRA are not taxed on Social Security payments if their provisional income is less than $25,000, however married couples filing jointly have a higher threshold of $32,000.
If your provisional income is between $25,000 and $34,000 for single filers or $32,000 and $44,000 for joint filers, you may be taxed on up to 50% of your Social Security benefits. For incomes above certain thresholds, up to 85% of benefits may be taxed. However, people who begin collecting Social Security after reaching full retirement age in 2025 will not be taxed on their benefits.
Earnings Test
Contrary to popular misconception, you can receive benefits while working; however, the benefits you receive will be lowered due to an earnings test that cuts your benefits before you achieve FRA.
If you remain below FRA for the whole year, the SSA will lower your benefits by $1 for every $2 earned above the yearly limit, counting only earnings up to the month before attaining FRA. The earnings cap for recipients who have not yet attained FRA is $22,320 in 2024, with an increase to $23,400 in 2025.