As fall approaches, the speculation about upcoming changes to Social Security begins. Nearly 50 million Americans are Social Security beneficiaries – including about 90 percent of those 65 and older – and the one time each year when most will get a hike in benefits is on January 1st when the cost-of-living adjustment (COLA) kicks in. As we wait, all eyes are on Washington.
But COLA isn’t the only change coming in 2025. There are at least two other adjustments that, depending on your income level, your age, and the stage of your working life, could affect you. To answer the “what’s coming in 2025” question, we offer this recent article from Kiplinger in which personal finance writer Donna LeValley gives us a preview of coming attractions.
“The Social Security Administration won’t announce any final adjustments until the second week of October,” the article begins, “but we can expect these three changes to take place in 2025.” Let’s peek into the crystal ball.
Anticipating Social Security Changes Helps Financial Planning
LeValley explains that the more we know about what’s coming with Social Security in 2025, the better equipped we’ll be to adjust. “Anticipating changes coming to Social Security in 2025 can help you start planning for the new year and identify any adjustments you can make to maximize your eligibility for the most benefits,” she writes.
She also has a word of warning for workers who think these changes don’t apply to them. “People who think these changes only impact retirees would be wrong,” LeValley writes. “Current workers need to keep an eye on accumulating enough Social Security credits and understand how much of their wages will be subject to the 6.2 percent Social Security tax.”
Even though we’ll have to wait a month until the Social Security Administration announces final adjustments, the Kiplinger article predicts that beneficiaries can expect these three changes to take place in 2025.
Social Security Changes: Look for a Relatively Modest COLA
The much-anticipated cost-of-living adjustment is directly tied to inflation, which is on the decline. As a result, says LeValley, you should look for a 2025 COLA that is “slightly smaller” than in 2024.
“Inflation eased for the fourth month in a row, to 2.9 percent, in July,” she writes. “The easing inflation rate means retirees will get a smaller increase in their Social Security checks next year, versus the increases they got in previous years when inflation was higher.”
In an August article, Kiplinger predicted that the 2025 COLA, now projected at 2.57 percent, will be the smallest in four years. “The projection is based on the July CPI numbers,” LeValley explains, “which is the first of three sets of numbers the SSA will use to determine the 2025 COLA.” (The final figure takes into account all of third quarter.) Last year, for payments in 2024, the Social Security COLA was 3.2 percent.
History of Social Security COLA Shows Highs and Lows
Courtesy of AARP, we took a look back at the COLA highs and lows of recent years. Since the COLA was launched in 1975, the figure has fluctuated significantly.
What’s the lowest COLA on record? Zero. Back in 2016, and prior to that in 2010 and 2011, beneficiaries received no COLA at all. (Benefits are not reduced in a recession, so the COLA can’t be a negative number.) By contrast, as recently as 2023 when inflation was raging, the COLA was pegged at a whopping 8.7 percent, the highest figure since the high-inflation days of the early 1980s.
A rise of 2.5 or 2.6 percent would come close to matching the average COLA since 2001.
“Keep in mind,” says Kiplinger’s LeValley, “that while a lower inflation rate should lead to a smaller increase in prices, it does nothing to lower the current prices for groceries, utilities, or housing that many are struggling to meet.” She cites the Kiplinger Inflation Outlook which has noted that, as of July, grocery and energy prices remain little changed, and that housing costs are stubbornly high.
Social Security Changes: Waiting Longer for Full Retirement Age
As Kiplinger notes, some retirees will have to wait a little longer to reach their full retirement age (FRA) in 2025.
“The full retirement age is increasing gradually if you were born from 1955 to 1960, until it gets up to 67,” says LeValley. “In 2025, the full retirement age will be 66 years and 10 months. For those who turned 66 in 2024, FRA is 66 years and eight months.”
The article shows when various boomers will reach FRA, by birth year:
If you were born in 1958, your FRA is age 66 and 8 months and was reached in 2024.
If you were born in 1959, your FRA is age 66 and 10 months and is reached in 2025.
If you were born in 1960 or later, your FRA is age 67 and will be reached in 2026 and after.
NOTE: People born on January 1 of any year, refer to the previous year.
Knowing your full retirement age matters, because taking benefits early will trigger a lifetime of reduced payments. It can also affect spousal benefits, so make sure you get good advice before opting to receive payments at age 62, which is the earliest possible Social Security retirement age.
Maximize Benefits by Waiting to File
If you start benefits any time before full retirement age, benefits will be reduced. The more months remaining between age 62 and your FRA, the more your monthly payments will be lowered.
“If you choose to continue working beyond your full retirement age and delay applying for benefits,” LeValley explains, “you can increase future Social Security benefits in two ways. [First,] each extra year you work adds another year of earnings to your Social Security record, and higher lifetime earnings can mean higher benefits when you retire.”
Second, waiting makes a major difference in the size of your monthly payment. “Benefits will increase from the time you reach full retirement age until you start to receive benefits, or until you reach age 70,” the article states. “For each full year you delay receiving Social Security benefits beyond full retirement age, 8 percent is added to your benefit.”
Social Security Changes: Understanding Credits and Taxes in 2025
It’s easy to ignore many of the details of how Social Security credits and taxes work, but some of this “fine print” can make a major difference, both in the benefits you receive and in the taxes you pay.
“In 2025, you’ll have to earn more to qualify for Social Security credits, and the wage cap for Social Security taxes will increase,” LeValley tells us.
Social Security credits. As Kiplinger explains, in order to qualify for benefits under Social Security, workers have to earn at least 40 work credits. These work credits are accrued at the rate of four credits per year. If you don’t have enough work credits on your employment record, the Social Security Administration cannot pay you benefits. (Work credits are also used to determine eligibility for other benefits including disability, Medicare, and survivor benefits.)
“To earn one credit in 2024, you must have wages and self-employment income of $1,730, and you must earn $6,920 to get four full credits,” LeValley writes. “This amount increases annually, so it will rise in 2025, but the exact amount hasn’t been announced yet. In 2023, you only needed to earn $1,640 to earn a credit, $90 less than what you need to earn in 2024.”
It’s important to note that earning more credits beyond 40 won’t automatically increase your benefit payment. “Instead,” says the article, “your retirement benefit is based on how much you earned during your working years.”
Wage cap. “Social Security caps the amount of income you pay taxes on and get credit for when benefits are calculated,” LeValley writes. For 2024, the Social Security tax limit is $168,600. Because this figure is tied to inflation, it will rise next year. “If you make more than $168,600 in 2025, you can expect a higher Social Security tax bill next year once this limit is increased,” the article warns.
Again, we were curious about the trend of the wage cap over the years, so we found this chart on the cleverly-titled website Financial Ducks in a Row. Just 10 years ago, the cap stood at $117,000. It has risen steadily through the years, with the biggest one-year hike taking place ($13,200) in 2023. If the 2025 cap is raised at the same rate as the projected COLA, the figure should be a bit over $172,000 next year.
But we’ll have to wait and see. Check back in October for an update here on the Blog.
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(originally reported at www.kiplinger.com)