Life is always changing, and programs like Social Security seem to never change, but they do. In fact, the Social Security Administration (SSA) updates the program every year to make sure it lasts as long as possible and stays up to date.
The cost-of-living adjustment (COLA) that it makes every year is one of the most well-known changes it makes. It’s not the only change, but the one that retirees are most affected by.
What are the main changes that will happen to Social Security in 2025?
There will be two main changes to Social Security that will directly affect retirees: the COLA mentioned above will apply to beneficiaries, and the maximum taxable income that current workers pay into the program will go up.
The 2025 Social Security COLA
It is an important part of Social Security because it makes sure that monthly benefits are in line with the current economy and protects seniors’ ability to buy things over time.
As of the third quarter of the previous year, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) was used to figure it out.
The COLA for 2025 was set at 2.5%, which is less than the average for the last ten years (2.6%) and a lot less than the previous years (8.7% in 2023 and 3.2% in 2024), which did not go over well with seniors or groups that work to help the collective.
While some think this lower COLA is good because it means inflation is slowing down, most think it’s not enough to make up for the price increases most people have seen since 2024.
If you want to get an idea, the average benefit in 2024 is $1,907, which means that retirees will get an extra $50. Many ideas have been put forward to increase the amount of COLAs that are given.
One of the most popular is to use the CPI-E, which is based on the same data as the CPI-W but is weighted toward workers 62 and older instead of young workers. This would give a more accurate picture of the costs that seniors face.
The increase in the maximum taxable income
A lot of people know that Social Security isn’t a program that can grow forever. This also means that not all income is taxed. This is done to make the difference between the taxed income and the benefit seem fair.
The highest amount of income that was taxed by Social Security in 2024 was $168,600. That amount will rise to $176,100 in 2025 because of the same COLA. People who make more than this amount will have to pay taxes on a bigger chunk of their pay.
The extra taxes will be split between the employer and the worker because most people don’t work for themselves. Depending on how much the worker makes, this will still raise taxes by about $465 a year.
Even though the increase seems bad right now, it will help workers get closer to the maximum Social Security benefit when they retire. That benefit is only given to people who paid the most in taxes for at least 35 years.
Plus, people who wait until they are 70 years old to claim their benefits will get an even bigger payout at the end of their working lives. If you make a lot of money, you can save a lot for retirement and get this benefit.
How to prepare for these changes in 2025?
Here are some useful tips that some people might want to think about:
For retired people: Use savings tools like retirement accounts to add to the small COLA increase, but watch out and don’t spend more than you can afford.
For workers with a lot of money: Tax strategies will save you money. Talk to a financial advisor about how to make the most of your Social Security contributions and how to take advantage of the future benefits that will come from these extra deductions.
Also, check the SSA portal to make sure that your contributions and income are saved correctly. This will make it easier to guess how much money you will get in the future.
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