Next year, some changes are happening to Social Security. They could affect both current retirees as well as people who are working now and paying into the benefits system.
It's helpful to know what these changes are so you'll be prepared for them. Here are three things to expect in 2025.
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1. Retirees will get a raise
One big change affecting current seniors is their cost-of-living adjustment (COLA). In most years, retirees see their benefits increase to keep pace with inflation. This is likely to happen in 2025, but the benefit increase will not be as big as it has been in recent years.
In 2024, for example, seniors saw their checks go up by 3.2%. While the 2025 raise won't be announced for a while, the most recent estimates from the Senior Citizens League suggest that the increase will be around 2.57%. That's the lowest COLA since the 1.3% raise retirees got in 2021.
COLAs are supposed to help ensure that retirees maintain their spending power even as prices rise. Unfortunately, the COLA formula isn't well designed and the Senior Citizens League estimates benefits have lost 36% of their buying power since 2000. A smaller COLA in 2025 is likely to leave retirees even further behind.
2. Full retirement age is increasing
Another change will impact those on track for retirement soon. It's a change to the full retirement age (FRA).
FRA is the age at which you can retire and get your standard benefit. It's based on your birth year. For those turning 66 in 2024, FRA is 66 and 8 months, as that is the FRA for anyone born in 1958. It's moving later, with those born in 1959 and turning 66 next year forced to wait until they are 66 years and 10 months old before they get their full benefit.
In 2026, FRA will increase again -- anyone born in 1960 or later is going to have an FRA of 67.
This shift is occurring because of Social Security reforms that took place in the 1980s. Legislation passed in 1983 to shore up Social Security by gradually phasing in a later full retirement age to stabilize the program's finances. Since Social Security's trust fund is in trouble again, with benefits projected to come up short in 2035, lawmakers may make subsequent changes to the program that could push FRA later again. However, based on the current law, no changes are expected after 2026.
Still, this means those who are retiring next year are forced to choose between waiting longer to claim their first check or accepting a lifetime reduction in monthly benefits due to early filing penalties that apply for each month they receive benefits ahead of FRA.
3. The maximum taxable income is increasing
The last change involves the maximum Social Security taxes you'll pay. This change impacts some current workers who are high earners.
See, there's a cap on the amount of income taxed by Social Security. Right now, you're taxed on income up to $168,600. However, this amount increases in most years to account for wage growth. In 2023, for example, workers paid Social Security taxes on only up to $160,200 in annual income.
Based on intermediate projections from the Social Security Trustees, the amount you pay Social Security tax on is likely to increase to $174,900 in 2025. Some workers who currently make above $168,600 could find themselves owing taxes on up to $6,300 more income.
With 2024 half over, current and future retirees need to be aware of these changes and prepare for them so they can get their finances ready for 2025.
