Several aspects of the Social Security program are revised each year to keep payments aligned with inflation and wages. Given that the Social Security Administration says that for about half of U.S. retirees, those benefits provide at least half their retirement income, it is imperative that retirees (and workers nearing retirement) understand those changes. Unfortunately, confusion about the program is common.
The 2024 Social Security Survey conducted by Nationwide Retirement Institute, an insurance and financial services company, found that many adults misunderstand basic aspects of the program. Here are four big changes coming to Social Security in 2025 that may surprise retirees.
1. Social Security benefits will get a 2.5% cost-of-living adjustment (COLA)
According to the Nationwide Retirement Institute, 66% of surveyed adults this past summer incorrectly marked the following statement as true: “Social Security is not protected against inflation.” Meanwhile, 61% of adults incorrectly marked the following statement as true: “Your monthly Social Security benefits amount will be reduced if deflation occurs.”
Consequently, some people will be pleasantly surprised to learn that the buying power of Social Security payments benefits is cushioned against inflation by cost-of-living adjustments (COLAs) almost every year.
In any given year, the COLA applied to Social Security payments depends on how a subset of the Consumer Price Index known as the CPI-W changed during the third quarter of the previous year. For instance, the CPI-W increased 2.5% in the third quarter of 2024, which means Social Security benefits will increase 2.5% in 2025. But COLAs can only be positive — benefits are never adjusted downward, even when there’s deflation. At worst, following a year when Q3 inflation was zero or less, there will be no change to retirees’ checks.
The Social Security Administration estimates the average retired worker’s benefit will increase from $1,927 per month in 2024 to $1,976 per month in January 2025. That means the average retired worker will receive an additional $49 per month in 2025, or $588 more for the year.
2. Some workers will pay more in payroll taxes
According to Nationwide, 74% of its survey respondents incorrectly marked the following statement as true: “Workers pay Social Security taxes on all of their income.” In fact, while Social Security is funded by a payroll tax, the amount of their income subject to taxation is capped.
The maximum taxable earnings limit is generally revised upward each year to account for changes in the average wage. For instance, the taxable maximum is $168,600 right now, but it will increase to $176,100 in 2025. So, in 2025, any income a person has exceeding $176,100 will be exempt from the Social Security payroll tax.
Employees generally pay 6.2% of their income to Social Security, while their employers are responsible for an equal amount. So, this year, the most a W-2 employee could pay in payroll taxes is $10,453 (i.e., 6.2% of $168,600). That will increase to $10,918 next year (i.e., 6.2% of $176,100), meaning some workers will pay up to $465 more in payroll taxes in 2025.
3. The maximum Social Security benefit for new retirees will increase
Among respondents to the Nationwide survey, 51% disagreed with the following statement: “I know exactly how to maximize my Social Security benefits.” On a related note, 40% of surveyed adults incorrectly marked this statement as false: “There is a cap to how much Social Security benefits you can get.”
There is indeed a maximum Social Security benefit. To accrue the biggest monthly payouts possible, a worker’s income would have to equal or exceed the taxable earnings limit for at least 35 years. In addition, they would have to delay claiming Social Security until they reach 70, which would give them all the delayed retirement credits available.
Social Security’s benefits formula is modified annually to account for changes in the average wage, such that the maximum payout typically increases each year. For instance, the maximum monthly benefit for newly awarded retirees is currently $4,873, but that figure will increase to $5,108 per month in 2025.
4. Retirees under FRA will be able to earn more money before any of their Social Security benefits are withheld
Among respondents to the Nationwide survey, 44% incorrectly marked this statement as false: “Some of your benefits may be withheld if you’re still working before your full retirement age (FRA).” But it’s true: When people who are taking their benefits before their full retirement age have wage income that exceeds the retirement earnings test (RET) amounts, some of their benefits will be withheld.
There are actually two RET limits — a lower limit that applies to Social Security beneficiaries who will not reach FRA during the year, and a higher limit for beneficiaries who will reach their FRA during the year. The RET limits are usually revised higher each year to account for changes in the average wage. Next year, those limits will be $23,400 and $62,160.
Retirees who are under their FRA for the full year will have $1 in benefits withheld for every $2 they have in earnings above $23,400. Retirees who reach their FRA during the year will have $1 in benefits withheld for every $3 they earn above $62,160. Importantly, the RET amounts no longer apply to money earned during the months after that beneficiary reaches their FRA.
But as the Social Security Administration points out: “It is important to note that any benefits withheld while you continue to work are not “lost”. Once you reach [FRA], your monthly benefit will be increased permanently to account for the months in which benefits were withheld.”
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4 Big Social Security Changes Coming in 2025 May Surprise Many Retirees was originally published by The Motley Fool
Source: finance.yahoo.com