Major Social Security changes are coming soon – Here are 5 important updates you need to be aware of

With the November general election looming, much of the public’s attention is focused on the presidential candidates and their potential impact on Social Security. However, regardless of the election outcome, significant changes to Social Security are already set to take place in 2025. These changes, which have been planned independently of who wins the presidency or which party controls Congress, will affect retirees, workers nearing retirement, and high-income earners alike.

Payments

One of the most anticipated changes is the increase in Social Security payments for retirees. This adjustment, known as the Cost-of-Living Adjustment (COLA), is an automatic mechanism built into the Social Security program. Its primary purpose is to help retirees maintain their purchasing power in the face of inflation.

The COLA is calculated based on a specific consumer price index that tracks inflation. As prices rise, the purchasing power of Social Security benefits tends to diminish. The COLA helps offset this by increasing benefit payments. Although the exact percentage increase for 2025 won’t be finalized until October, current estimates suggest a 2.6% rise. This adjustment, though seemingly small, is crucial for retirees who rely on Social Security as a significant portion of their income.

Credits

Social Security benefits are earned through work credits. To qualify for benefits, an individual must accumulate 40 work credits, with a maximum of four credits obtainable each year. The number of credits earned is based on the amount of income an individual earns and pays taxes on.

In 2024, the income required to earn one work credit is $1,730, meaning that earning $6,920 in that year would secure the maximum four credits. However, this threshold increases annually to reflect wage growth. For example, the threshold was lower in 2023, at $1,640. The increase in the threshold is something workers, especially those with lower incomes, should monitor closely. Failing to accumulate enough work credits could result in ineligibility for Social Security benefits upon retirement, making it essential to stay informed about these changes.

Earnings

For individuals 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. However, the situation is different for those who have not yet reached full retirement age.

If you earn above a certain threshold before reaching full retirement age, you may see a reduction in your Social Security benefits. Although these benefits are restored once you reach full retirement age, this interim reduction can significantly impact your monthly income. The threshold for 2024 is set at $22,320, but it will likely increase in 2025, allowing individuals to earn more without affecting their benefits. This adjustment is beneficial, as it enables workers to bring home a larger paycheck while still receiving benefits.

Retirement

A significant change set for 2025 affects those nearing retirement. The age at which individuals can claim full Social Security benefits without penalties, known as the full retirement age, will increase slightly.

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. While the difference might seem minor, filing for benefits earlier than this age will result in monthly penalties, reducing the amount of Social Security benefits you receive.

This gradual increase in the full retirement age is part of a long-term strategy to address Social Security’s financial challenges, initially established by legislation passed in 1983.

Taxation

For high-income earners, a less favorable change is on the horizon. The maximum amount of income subject to Social Security tax will rise in 2025.

Currently, Social Security taxes apply 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. As a result, individuals earning more than this threshold will see a larger portion of their income subject to Social Security taxes, leading to a higher tax bill.

These changes underscore the importance of staying informed about Social Security policies. Whether you’re already receiving benefits or still working towards retirement, knowing these adjustments can help you better prepare for the future.

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