As we advance beyond the midpoint of 2024, it’s an excellent opportunity to begin planning for the financial outlook of 2025. One key aspect to monitor is Social Security, which experiences yearly adjustments that affect both retirees and working individuals. Here are three almost certain changes in Social Security for 2025 that you should start preparing for:
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Benefits
Social Security benefits receive an annual cost-of-living adjustment (COLA) to help seniors preserve their purchasing power amid inflation. In 2024, benefits were raised by 3.2%, following an 8.7% increase in 2023. However, the COLA for 2025 is projected to be around 2.63%, which is lower than the recent increases. Although this isn’t the smallest increase on record, it marks a reduction compared to the past few years.
COLAs are determined based on third-quarter inflation data, so the final figure for 2025 will be confirmed later in the year. If you’re currently receiving Social Security, this 2.63% estimate can aid in planning your finances. If the smaller increase concerns you, consider reducing expenses or exploring additional income opportunities through the gig economy.
Taxes
Social Security is primarily funded through payroll taxes, but higher earners are exempt from paying these taxes on all their income due to a wage cap. For 2024, this cap is set at $168,600, meaning earnings above this threshold are not subject to Social Security taxes. However, this cap generally increases each year in response to inflation and wage growth.
In 2025, it is expected that the wage cap will rise, resulting in higher Social Security tax contributions for those with higher earnings. If you fall into this category, it may be beneficial to consult with an accountant to explore tax strategies such as maximizing retirement contributions or strategically realizing investment losses to offset taxable income.
Eligibility
To qualify for Social Security benefits, individuals need to accumulate 40 work credits throughout their lifetime, with a maximum of four credits earned per year. For 2024, one work credit is equivalent to $1,730 in earnings. This threshold is anticipated to rise in 2025, which could make it more challenging for those working very part-time to earn the required credits.
However, full-time workers should not be significantly impacted, as a full-time minimum wage job generally provides the necessary four credits annually. If you work part-time and are aiming to qualify for Social Security, consider increasing your hours to ensure you meet the new earnings threshold.
Preparation
These upcoming changes underscore the importance of staying informed about Social Security updates. Whether you are retired or still working, understanding these adjustments can aid in effective planning. If you anticipate being impacted by these changes, consider taking proactive measures now, such as revising your tax strategies or exploring additional savings options.
By staying ahead of these developments, you can better manage the financial implications and keep your retirement plans on course. Preparing in advance will help you address potential challenges and ensure a more stable financial future.
FAQs
How much will Social Security benefits increase in 2025?
The projected increase is 2.63%.
What is the current limit on wages subject to Social Security taxes?
The wage cap for 2024 is $168,600.
How many work credits are needed for Social Security?
You need 40 work credits over your lifetime.
Will part-time workers be affected by the new work credit threshold?
Yes, part-time workers may need to increase their hours to meet the new threshold.
How can higher earners offset increased Social Security taxes?
They can maximize retirement contributions and take strategic investment losses.
