As we move into the fall, it’s time to think ahead and ensure your finances are in order, especially with the upcoming holiday season. For retirees, the end of the year means more than just festive plans—it’s also when key changes to Social Security benefits are announced.
In 2025, several updates will affect how retirees plan for the future, especially with the new cost-of-living adjustment (COLA) and other important modifications. Let’s break down what to expect from Social Security in the coming year.
Tax Increase
One of the most significant changes in 2025 will be higher Social Security taxes for workers earning above a certain threshold. In 2024, the maximum income subject to Social Security payroll tax was raised from $160,200 to $168,600. This threshold is tied to inflation, meaning it’s likely to increase again in 2025.
What does this mean for you? If your income exceeds that limit, you’ll pay more in Social Security taxes. While this doesn’t affect the benefits retirees currently receive, it does impact how much future retirees contribute to the program. The extra tax can feel like a financial hit for high-income workers, but it helps ensure the long-term sustainability of the Social Security system.
Changes
The Social Security Administration (SSA) has also updated its policies regarding overpayments, which have been a sore point for many beneficiaries in recent years. Overpayment happens when the SSA accidentally pays out more benefits than you are eligible to receive, and this can happen for a variety of reasons, including miscalculations or delayed reporting of changes in income or status.
Here’s what’s changing:
- Reduced repayment: Starting March 25, 2024, beneficiaries will only have to repay the greater of $10 or 10% of their Social Security benefits if they were overpaid. This is a huge decrease from the previous repayment rate of 100%, which left many beneficiaries financially strained.
- Extended repayment period: Beneficiaries can now request a longer period to repay their debt. If the new repayment rate can repay the overpayment within 60 months, the SSA will approve the request, instead of the previous 36 months.
- Streamlined appeals: If you believe you were overpaid or can’t afford to repay the amount, you can appeal the decision. While your appeal is being processed, no repayments are required, and the SSA has introduced more flexible repayment plans for those who owe money.
These changes aim to reduce financial pressure on retirees and other beneficiaries who may have been overpaid through no fault of their own.
Spousal Benefit
A long-standing rule regarding Social Security spousal benefits will end in 2024 for all but those born before January 1, 1954. This rule allowed couples to alternate between their own benefits and their spouse’s, enabling them to maximize their Social Security income.
Under the expired rule, one spouse could claim spousal benefits at full retirement age while allowing their own benefits to grow until age 70. This allowed retirees to maximize delayed retirement credits. However, for those born after 1954, this option is no longer available, meaning they will need to decide carefully when to claim Social Security benefits to get the most out of their retirement income.
COLA
The Cost-of-Living Adjustment (COLA) is one of the most anticipated changes each year for Social Security recipients. In 2024, Social Security beneficiaries received a 3.2% COLA increase, which raised the average monthly benefit for retirees to $1,864.52. While this was a welcome bump, it’s significantly lower than the 2023 increase, which was driven by higher inflation.
Looking ahead, COLA for 2025 is expected to be even lower, projected at 2.57%. While inflation is cooling down, many retirees will still feel the pinch of rising costs for essentials like food and housing.
Even though the COLA adjustments aim to keep up with inflation, it’s important to note that these increases may not fully offset the cost increases in other areas, such as healthcare or property taxes.
How to Prepare
With these changes on the horizon, it’s essential to adjust your financial planning accordingly. Here are some tips:
- Review your retirement income: If you’re still working, pay attention to how the Social Security tax threshold increase may affect your paycheck. It’s worth discussing with a financial advisor to adjust your savings strategy if necessary.
- Stay informed about overpayment rules: If you’re a current beneficiary, keep track of any communication from the SSA regarding your benefits to avoid surprises. If you’ve been overpaid, know your repayment options and the appeals process to minimize financial strain.
- Plan for a lower COLA: With a lower COLA expected for 2025, budget accordingly. Keep an eye on your monthly expenses, and consider how the rising cost of essentials might affect your retirement budget.
- Spousal benefits: If you’re part of a couple nearing retirement, review your options carefully. The end of the spousal benefit provision may change your retirement strategy, so it’s worth revisiting your plan to make sure you’re maximizing your Social Security income.
In summary, while Social Security continues to evolve, it remains a critical component of financial planning for retirees. By staying informed and adjusting your strategies, you can navigate these changes effectively and make the most of your benefits.
FAQs
How will taxes change for high-income earners in 2025?
The income threshold subject to Social Security payroll tax will increase, leading to higher taxes for those earning above the limit.
What’s changing with overpayment policies?
Beneficiaries will have reduced repayment rates, a longer repayment period, and more appeal options.
Is the spousal benefit provision ending?
Yes, the provision ends for those born after January 1, 1954, limiting options to alternate between spousal and personal benefits.
What is the expected COLA for 2025?
The projected COLA for 2025 is 2.57%, lower than the 2024 increase.
How will these changes affect my retirement?
You may need to adjust your financial planning, especially with lower COLA and changes to spousal benefits.
