Social Security remains a hot topic in today’s political climate, especially as the program faces financial challenges that could impact millions of retirees. While significant reform is unlikely before the end of 2024, it’s important to stay informed about the built-in changes that occur annually.
These adjustments can significantly affect your benefits and financial planning, so knowing them is key. Here’s a closer look at three significant changes coming to Social Security in January.
COLA Adjustment
One of the most anticipated changes to Social Security each year is the annual cost-of-living adjustment (COLA). This adjustment aims to ensure that Social Security benefits keep pace with inflation, providing retirees with a slight increase in their monthly payments to offset rising costs.
The Social Security Administration calculates the COLA based on the growth of a subset of the Consumer Price Index (CPI) during the third quarter of each year. For 2025, the Senior Citizens League has forecasted a COLA increase of 2.6%. Although this is lower than the adjustments in recent years, it is above the Federal Reserve’s long-term inflation target of 2%. This modest increase is generally more beneficial than a higher one during periods of rapid inflation, as it helps maintain the purchasing power of Social Security benefits.
Staying informed about COLA changes is crucial for both retirees and those approaching retirement, as it directly impacts monthly income. Even a small percentage change can add up over time, influencing your overall financial health during retirement.
Retirement Age
Another important change involves the ongoing increase in the full retirement age (FRA). The FRA is the age at which you are entitled to receive 100% of your Social Security benefits. Due to a law passed in 1983, this age is gradually rising from 65 to 67, depending on your birth year.
For instance, individuals born in 1958 will reach their full retirement age in 2025 at 66 years and 8 months. For those born in early 1959, the FRA will be 66 years and 10 months. Eventually, for those born in 1960 or later, the FRA will settle at 67.
Knowing your FRA is essential because it determines the exact benefits you’ll receive. Claiming benefits before reaching this age results in a permanent reduction, while delaying your claim can increase your monthly payments due to delayed retirement credits. Planning your retirement with your FRA in mind can help you maximize your Social Security benefits.
Tax Thresholds
Social Security taxes are another area where changes might affect your finances, especially if you are a high earner. The standard Social Security tax rate is 6.2% of your income, matched by your employer for a total contribution of 12.4%. However, there is an income cap—known as the taxable maximum—above which earnings are not subject to Social Security taxes.
This cap is adjusted annually based on national wage trends. For 2024, the taxable maximum was $160,200, meaning any earnings above this amount were not taxed for Social Security. The cap will likely increase in 2025, so if you are a high earner, you might find more of your income subject to Social Security taxes.
Knowing these thresholds is important for financial planning, particularly if you’re nearing the cap. The amount of income subject to Social Security taxes can impact your overall tax strategy and retirement savings plan.
Staying on top of these changes can help you make informed decisions about your retirement. Whether you’re already retired or still working, knowing how Social Security adjustments affect your financial future is crucial.
As these changes take effect, it’s more important than ever to stay informed and proactive in your retirement planning. By knowing the nuances of Social Security and how these annual adjustments may impact you, you can better prepare for the future.
FAQs
How is Social Security COLA determined?
COLA is based on the Consumer Price Index during the third quarter.
What is the full retirement age in 2025?
It’s 66 years and 8 months for those born in 1958.
Can delaying Social Security benefits increase my payments?
Yes, delaying benefits past full retirement age increases payments.
What is the Social Security taxable maximum for 2024?
The taxable maximum is $160,200, likely rising in 2025.
Does inflation affect Social Security benefits?
Yes, inflation impacts the annual COLA adjustment.
