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As we near the end of the year, it’s time to begin thinking about your finances heading into 2025.
If you’re retired or will be retiring soon, Social Security will likely play a role in your financial future. More than 40% of baby boomers say their benefits will be their primary source of income in retirement, according to a 2024 report from the Transamerica Center for Retirement Studies, so it’s wise to stay on top of how your benefits might change.
Each year brings fresh adjustments to the Social Security program, and although many of these changes are subtle, they can still have a major impact on your retirement. From the latest cost-of-living adjustment to various income limits, here are the good (and not-so-good) changes retirees can expect starting next year.
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The good news coming in 2025
1. The COLA is increasing
The first piece of good news is that beneficiaries will see a 2.5% bump in benefits beginning in January, thanks to the cost-of-living adjustment (COLA). The average retiree collects just over $1,900 per month in benefits, which amounts to a raise of roughly $50 per month.
While this will be the smallest COLA since 2021 (and substantially smaller than the 5.9% and 8.7% raises in 2022 and 2023, respectively), there is a silver lining: it means inflation is slowing down.
The COLA is tied directly to shifts in inflation, which is why the adjustments were so high in 2022 and 2023 when costs were skyrocketing. As of October 2024, the 12-month percentage change in the Consumer Price Index was 2.6%, as measured by the Bureau of Labor Statistics — which is far lower than the record high of 9.1% in June 2022.
A smaller COLA will be a disappointment to many retirees, but lower costs will likely have a bigger impact on your finances than a slightly higher adjustment.
2. The earnings test limits are increasing
If you’re under your full retirement age (FRA) and still working in any capacity while collecting Social Security, you’ll be subject to the retirement earnings test. This is an income limit that determines how much, if any, of your benefits will be withheld due to your earnings.
There are two different limits, depending on whether you will or will not reach your FRA in 2025. Your FRA will depend on your birth year, but it’s age 67 for everyone born in 1960 or later. The more you’re earning, the more of your benefits you can expect to be withheld.
The good news, though, is that both of these income limits will be increasing in 2025. This means that you’ll be able to earn more before facing benefit reductions.
| Income Limit: 2024 | Income Limit: 2025 | Benefit Reduction | |
|---|---|---|---|
| If you will not reach your FRA in 2025 | $22,320 | $23,400 | $1 for every $2 over the limit |
| If you will reach your FRA in 2025 | $59,520 | $62,160 | $1 for every $3 over the limit |
Source: Social Security Administration. Table by author.
So, for example, say that you’re 64 years old with an FRA of 67, and you’re earning $30,000 per year working part-time. You won’t reach your FRA this year, so you’ll be subject to the smaller income limit. In 2024, your income exceeds the limit by $7,680 — reducing your benefits by $3,840 per year, or $320 per month.
However, assuming your income doesn’t change in 2025, those wages will only be $6,600 over the new limit. In that case, your benefits will only be reduced by $3,300 per year, or $275 per month. In other words, you’ll be able to keep an additional $45 per month without lifting a finger.
The not-so-good news
1. Achieving the maximum benefit will be more difficult
Most of the changes coming to Social Security next year are positive. Aside from the COLA and the increased earnings test limits, the maximum benefit will also be increasing from $4,873 per month to $5,108 per month.
However, a higher max benefit also means that the maximum taxable earnings limit is increasing. This limit is the highest income subject to Social Security taxes, and you’ll need to consistently reach this cap to earn the maximum possible benefit amount.
In 2024, the limit is $168,600 per year. Starting next year, though, it will increase quite substantially to $176,100 per year. Not only will this make it more difficult to earn the max benefit, but if you’re earning between $168,600 and $176,100 per year, you’ll face Social Security taxes on more of your income.
With several changes on the horizon, it’s wise to stay updated on how Social Security adjustments will affect your finances. The more you can start preparing now, the better off you’ll be heading into next year.
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