Prepare for These 5 Social Security Changes in 2025
5 Key Social Security Changes Coming in 2025: What You Need to Know
Don't expect a status quo in Social Security. Starting January 1st, 2025, 5 significant changes will impact your benefits. Here's what you need to know and how to prepare:
1. A Smaller-Than-Expected Cost-of-Living Adjustment (COLA):
Social Security benefits are adjusted annually to account for inflation (COLA).
The projected 2025 COLA is currently estimated at 2.57%, lower than the 3.2% increase in 2024.
This means your benefits won't keep pace with rising living costs as effectively.
While the final number might slightly change, plan for a less generous increase than you saw this year. Budget accordingly.
2. A Higher Wage Cap for Social Security Taxes:
Social Security is primarily funded by payroll taxes on earnings.
There's an annual wage cap—the maximum income subject to Social Security tax.
The 2024 cap is $168,600; the 2025 cap will likely increase due to inflation.
If your income exceeds this cap, expect to pay higher Social Security taxes in 2025.
How to Prepare:
Maximize contributions to tax-advantaged retirement accounts (401(k)s, IRAs) to offset the higher tax burden.
Explore eligibility for Health Savings Accounts (HSAs) or Flexible Spending Accounts (FSAs) to reduce your taxable income.
3. A Higher Earnings Threshold for Work Credits:
You need 40 work credits to qualify for Social Security retirement benefits.
Each year, you can earn up to four credits.
The earnings required to receive a credit will increase in 2025 due to inflation.
This change most significantly affects part-time or gig workers who may need to adjust their work schedules or income to acquire the necessary credits.
How to Prepare:
Monitor for the official announcement of the updated work credit value (expected in October).
Calculate how much you need to earn to secure your four credits for the year.
Adjust your work schedule or explore alternative income sources if needed.
4. Increased Earnings Threshold for Reduced Benefits Before Full Retirement Age:
If you're under your full retirement age and claim Social Security benefits while working, your benefits may be reduced if your earnings exceed a certain threshold.
This earnings threshold is indexed to inflation and will increase in 2025.
Although the exact amount isn't yet known, the increased threshold will allow higher earnings before benefit reductions.
5. Later Full Retirement Age:
Are you ready to work slightly longer?
The age at which you can claim full Social Security benefits without penalties is gradually increasing.
In 2025, those turning 66 will need to wait until 66 years and 10 months to receive their full, unreduced benefits, unlike those turning 66 in 2024 who can claim at 66 years and 8 months for those born between 1955 and 1960.
Notice how the government every so slightly is increasing the full retirement age – a note of caution for us who have yet to file for benefits.
Claiming benefits earlier will result in permanently reduced monthly payments.
These changes are driven by inflation adjustments and previous legislative actions. They'll impact everyone, regardless of political affiliations. Planning ahead is crucial to mitigate their effects on your retirement security.
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