With the upcoming November general election, much attention is focused on the potential influence of presidential candidates on Social Security’s future. However, regardless of who wins the presidency or which party dominates Congress, significant changes to Social Security are already set to take place in 2025. Here are five key aspects of Social Security that will be affected, independent of the election outcome.
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Increase in Social Security Payments for Retirees
One major change on the horizon will directly benefit current retirees. Individuals already receiving Social Security benefits will see an increase in their payments in 2025. This adjustment is due to the automatic cost-of-living adjustments (COLAs) built into the program, designed to help retirees keep up with inflation.
The COLA is determined by a formula that tracks changes in a specific consumer price index, which measures inflation. This adjustment is essential because, as prices rise, the purchasing power of retirees diminishes. Current estimates suggest a 2.6% increase in benefits, though the exact figure will not be confirmed until October, when data from the third quarter of the year is fully analyzed.
Changes in Work Credit Requirements
Social Security operates as an “earned benefits” program, meaning that eligibility for benefits is based on earning work credits. To qualify for benefits, one needs to accumulate 40 work credits, with a maximum of four credits obtainable each year. These credits are earned by working and paying taxes on the income earned.
In 2024, the amount of income required to earn one work credit is $1,730. Therefore, by earning $6,920 in that year, an individual would secure the maximum four credits. The amount needed to earn a work credit increases annually to reflect wage growth, so staying informed about these changes is crucial, especially for lower-income workers.
Earnings Limits and Social Security Benefits
For those who have reached their full retirement age, there are no restrictions on the amount of money they can earn while still receiving full Social Security benefits. This policy remains unchanged.
However, the situation is different for individuals who have not yet reached full retirement age. If they earn above a certain threshold, they will begin to lose some of their Social Security benefits. Although these benefits are eventually restored when they reach full retirement age, during the interim, they may find their Social Security payments significantly reduced if their income exceeds the limit.
The threshold for how much one can earn before this reduction occurs is adjusted annually to keep pace with inflation. In 2024, the earnings limit is set at $22,320. While the 2025 limit has not been disclosed yet, it is expected to increase, allowing individuals to earn more without affecting their benefits.
Full Retirement Age Adjustment
Another substantial change set for 2025 affects those nearing retirement. The age at which individuals can claim full Social Security benefits without penalties will shift slightly later.
In 2024, individuals turning 66 can claim their full benefits at 66 years and 8 months. However, those who turn 66 in 2025 will need to wait until they are 66 years and 10 months to receive their full, unreduced benefits. Filing for benefits earlier than this age will result in monthly penalties, reducing the amount of Social Security benefits they receive.
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Increase in the Income Subject to Social Security Tax
High-income earners will face a change that may be less welcome. The maximum amount of income subject to Social Security tax is set to rise in 2025.
Currently, Social Security taxes are applied only to income up to a certain cap. In 2024, this cap is set at $168,600. However, since the cap is indexed to inflation, it will increase in 2025. Consequently, individuals earning more than this threshold will see a higher portion of their income subject to Social Security taxes, leading to a larger tax bill.
These upcoming changes highlight the importance of staying informed and prepared as we approach 2025, ensuring that you can maximize your Social Security benefits.