As the new year brings changes to Social Security, certain recipients may prefer certain changes over others. This is especially concerning if, like more than 40% of baby boomers, your benefit is or will be your primary source of income in retirement. Keeping up with the program’s ebbs and flows will result in a smooth transition and a more pleasant retirement.
These are some of the expected changes.
1. The COLA is increasing
Starting in January, benefits will increase by 2.5% due to the cost-of-living adjustment (COLA).For the average retiree earning somewhat more than $1,900 per month, this is a $50 increase per month.
This is the smallest COLA since 2021 and far smaller than the big hikes of 5.9% in 2022, 8.7% in 2023, and 3.2% in 2024. On the positive side, inflation is gradually slowing down after the epidemic wreaked havoc in the economy.COLAs are directly linked to inflation, leading to significant increases during periods of rapid price growth. The Bureau of Labor Statistics reports that inflation reached a 40-year high of 9.1% in June 2022, but has since decreased to 2.6% as of October 2024.
While some retirees may be unhappy by the reduced rise, the decline in inflation could be a blessing, since cheaper prices allow retirees to stretch their money longer, perhaps softening the impact of a more modest adjustment.
2. The Social Security earnings test limits are increasing
Working while collecting benefits is feasible, contrary to popular opinion. The retirement earnings test may result in a percentage of your benefits being withheld based on your income. This applies just until you reach your full retirement age (FRA), after which you can continue working and get full benefits.
The Social Security Administration (SSA) sets two restrictions based on whether or not you will attain your FRA by 2025. Both of these income restrictions will rise in 2025, allowing you to earn more before receiving benefit reductions.
| Income Limit: 2024 | Income Limit: 2025 | Benefit Reduction | |
| If you will not Advertisement
reach your FRA in 2025 |
$22,320 | $23,400 | $1 for every $2 over the limit |
| If you will Advertisement
reach your FRA in 2025 |
$59,520 | $62,160 | $1 for every $3 over the limit |
3. Both the Maximum benefit and the maximum taxable earnings limit are increasing
Applying the COLA to the maximum benefit increases monthly payments from $4,873 to $5,108 for eligible beneficiaries. To qualify for benefits, you must have reached 70 years old and earned the maximum taxable earnings limit throughout the 35-year retirement period.
While this is wonderful news for individuals who receive the benefit, it may not be as beneficial for those striving to do so. The maximum taxable earnings cap is also increasing, making it slightly more confusing for the typical American.
In 2024, the highest taxable earnings limit is $168,600 per year. Earnings beyond this level are not taxed. In 2025, it will climb to $176,100 per year. This means that for people earning between 2024 and 2025, their taxes will rise with each new year.
Paying more to Social Security improves the system’s ability to function, notwithstanding negative perceptions of salary increases.
