Although 2025 is quickly approaching, there is still time to learn how the changes to Social Security may affect your benefits once they are enacted in the new year. Not all changes are beneficial to receivers, but this provides an even greater motivation to stay informed and address issues before they have a detrimental impact.
A higher maximum taxable earnings limit
Not all earnings are subject to Social Security taxes; payroll taxes have a threshold, generally known as the maximum taxable earnings limit. In 2024, this ceiling was established at $168,600 per year, with anything above that amount exempt from Social Security taxes; however, in 2025, this figure will be raised to $176,100 per year.
This means that workers will pay taxes on a larger portion of their earnings. For those who want to do the math, it is an additional $7,500 each year at the current 12.4% tax rate. This translates to a $930 per year increase in payroll taxes.
A modest silver lining is that this hike will only affect a small number of taxpayers, given the majority already pay taxes on 100% of their income.
A new COLA is coming
The most important update for anybody receiving benefits is the cost-of-living adjustment (COLA) hike, which will apply to all payments beginning in January. The hike, announced in October, will be 2.5% in 2025, substantially lower than anticipated. Given that the Social Security Administration (SSA) pays an average retirement payment of $1907, the average adjustment will be little less than $50.
While a smaller COLA suggests lower inflation, the jubilation is dampened by a $10 increase in Medicare Part B premiums and all the savings spent trying to make ends meet since the outbreak.
Higher earnings test limits can boost your benefit
Many seniors are unaware that they can work while receiving Social Security benefits, but if they do, earning more than a specific amount reduces their check. This is the earnings-test limit.
There are two limits: one for individuals under full retirement age (FRA), and another for those who will reach FRA in 2025. For individuals under the FRA, the annual income limit will increase from $22,320 to $23,400, and your benefits will be cut by $1 for every $2 you earn above the limit.
For those who reach FRA in 2025, the income ceiling will be raised from $59,520 to $62,160 per year, and your benefits will be cut by $1 for every $3 you earn above the level.
Benefit reductions are temporary and will be adjusted into your payments as soon as you turn your FRA and the earnings test restriction no longer applies.
The maximum Social Security retirement benefit will rise
The maximum Social Security payment is subject to two conditions: you must work for at least 35 years, earning the maximum taxable earnings for all years considered to calculate the benefit, and you must wait until you reach the age of 70 to begin collecting benefits.
Each retirement age has a benefit cap, and while FRA is theoretically the highest benefit based on your records, waiting until age 70 increases your benefit amount by 8% every year. This indicates that you will gain a greater benefit without doing anything other than waiting.
In 2025, the maximum benefit will increase from $4,873 to $5,108 per month. The rest of the restrictions will rise as well; for people who desire to retire and claim benefits at FRA, the maximum payout will increase from $3,822 in 2024 to $4,018 in 2025.
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