Understanding the upcoming Social Security changes in 2025 can help you plan ahead and optimize your benefits. Let’s also not jump the gun in thinking these changes only affect soon to be or current retirees. Current members of the labor force should also be aware of their accumulation of Social Security Credits and keep an eye on how much of their wages will be subject to the 6.2% Social Security Tax.
It is important to note – The Social Security Administration will be announcing any final changes in October, nevertheless these are what recipients can expect to see coming as we head into the new year.
The waiting game
Starting in 2025, retirees will need to wait slightly longer to reach their full retirement age (FRA). This gradual increase affects those born between 1955 and 1960, eventually reaching 67.
In 2025, FRA will be 66 years and 10 months. For those who turned 66 in 2024, FRA was 66 years and eight months.
Here’s when you’ll reach your FRA based on your birth year:
- Born in 1958: FRA was 66 years and six months (reached in 2024)
- Born in 1959: FRA is 66 years and 10 months (reached in 2025)
- Born in 1960 or later: FRA is 67 years (reached in 2026 and after)
*If you were born on January 1st of any year you would need to refer to the previous year’s guidance.
Time Clocks and Taxes
Before expanding on this topic, let’s first lay out why this is important in the simplest of terms. The Social Security Administration cannot pay you social security benefits unless you have earned at least the minimum amount of social security credits to qualify for retirement benefits. In order to reach this required amount an individual working must earn at least 40 work credits. You are allowed to earn four credits per year. This number of credits that an individual earns then determines their level for retirement and/or disability benefits, Medicare, and their family’s survivor benefits if they qualify. Also, once you earn your 40 credits it is not advantageous to continue to collect credits as it won’t improve your retirement benefits.
Now you are probably asking- How do I actually earn these credits?
Currently in 2024, for a working individual to earn one credit you must have wages or self-employment income of at least $1,730. Thus, you must earn at least $6,920 to receive all four credits for the year. This amount historically increases annually and is expected to continue to do the same.
Social Security does have a wage cap, which limits the income subject to taxes and used for calculating benefits. The cap is currently $168,600 and is adjusted annually for inflation. In 2023, the cap was $160,200, increasing by $8,400 to $168,600 in 2024. This was a smaller rise compared to the $13,200 increase from 2022 to 2023. However, if you earn more than $168,600 in 2025, you’ll likely face a higher Social Security tax bill due to the increased wage cap.
Cost of Living Adjustment (COLA)
Though it may seem obvious , COLA is a periodic increase in wages or benefits to compensate for inflation. In the context of Social Security, COLA is an automatic adjustment made each year to increase benefits to keep pace with rising prices. This ensures that retirees can maintain their purchasing power even as the cost of living increases over time. Luckily, in 2025, COLA is actually expected to be LOWER than in 2024!
Inflation continued to decline in July, reaching 2.9%. This means retirees will receive a smaller increase in their Social Security benefits next year compared to previous years with higher inflation. The projected COLA for 2025 is currently estimated at 2.57%, based on the July Consumer Price Index (CPI) data. However, the final COLA will be determined using three sets of CPI numbers, and the final figure will be announced in October.
For 2024, the Social Security COLA was 3.2%. It also is important to share that this primarily is good news…. lower inflation should lead to smaller price increases, but it doesn’t address the current high costs of groceries, utilities, or housing that many are facing.
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Sources:
- Kiplinger: https://www.kiplinger.com/retirement/social-security/changes-coming-for-social-security-in-2025
