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Each fall, as the leaves start to turn color, the Social Security Administration (SSA) announces important changes for the upcoming year. These changes impact workers who are collecting benefits and workers who have not yet filed for benefits.
The provisions include regular adjustments that affect the amount of benefit payments. They also include recalibrations for what is paid into the system and what is taxed. Ironically, the announcement does not flag how some of these changes may subject Social Security recipients to an additional tax bite.
Cost of living
The most published Social Security change is always the cost-of-living adjustment (COLA), which is aimed at keeping benefits up with inflation. These benefit increases apply to everyone over age 62 or people who are collecting benefits because of a disability or who are collecting benefits as a survivor of a worker who was covered by Social Security.
During the months of July, August, and September the SSA monitors the Department of Labor CPI-W index. If the index increases during this three-month period, then the COLA for the coming year will go up. If there is no increase in the CPI-W index, the benefits will remain the same. One of the great features of the Social Security COLA program is that the benefits can only go up. They never go down even if there is a decrease in the CPI-W index.
The announced COLA increase for 2025 is 2.5 percent. This is less than the 3.2 percent increase in 2024 and far less than the 8.7 percent increase in 2023 and the 5.8 percent increase in 2022.1 However, when you look at the cumulative total of these increases, they total 20.3 percent in a four-year period. Very few, if any, defined benefit pension plans have this type of COLA increase built into the benefit package for their workers. The COLA benefit in Social Security can be a very significant part of a retirement income plan. (Related: Why you need your Social Security Blue Bar report)
Taxable earnings
In addition to the benefit increase for 2025 comes a corresponding increase in how much workers will pay into the Social Security system in the coming year. The maximum taxable earnings for 2025 will top out at $176,100, which is a 4.4 percent increase from the maximum taxable earnings limit in 2024. Even though this represents an increase in the FICA tax limits (higher-income workers pay more), it is offset by higher potential benefits that will be paid to higher-income workers when they retire. In 2024, the maximum benefit paid at full retirement age is $3,822 per month. In 2025 the maximum benefit paid at full retirement age will be $4,018, which is a 5.1 percent potential benefit increase.
Also hidden in the October changes is how much it costs to earn a Social Security credit (or sometimes called a “quarter”). To be fully insured for retirement benefits, it takes 40 credits to qualify. You can only earn four credits in any give year. The cost of a credit in 2025 will be $1,810, which is an increase from $1,730 in 2024. This is a 4.6 percent increase in the cost of a credit.
Earnings test
The last major and often-overlooked increase announced for 2025 is the size of the earnings test thresholds. The earnings test is the SSA's way of encouraging workers to not file for benefits from ages 62 to 67 if they are working. Essentially, for every dollar an individual in this age range makes above a certain income limit, the SSA will withhold some of their benefits. (Related: Can I work and still receive Social Security benefits?)
For 2025, the earnings test exempt amount will increase to $23,400 a year, or $1,950 a month. This higher amount is actually good news for lower-income workers — under full retirement age — who want to keep working while collecting Social Security benefits. For workers who will reach their full retirement age in 2025, the earnings test is substantially increased to $60,160 a year, or $5,180 a month.
For the details on the earnings test, see this link to the SSA.gov website. Failure to recognize the earnings test rules can result in overpayment of benefits, which will create major problems the following year.
Benefit increases? Or stealth tax?
Although often ignored by the media, there is yet more Social Security news that workers receive in October. If you are working and collecting benefits and your income this year is higher than your inflation-adjusted income in the past, you could receive a benefit increase announcement for 2025. This increase is caused by an automatic recalculation of your 35-year earnings history.
Benefits are all based on the highest 35-years of your working life. If you are making more now than earlier in your career, this could result in an uptick in your average. When the average goes up, the benefit increases. Plus, if anyone is attached to your work record, like a spouse or child, then their benefit could receive an increase as well. (Related: Social Security spousal and survivor benefits: Different and not equal)
What is never in any October announcement about Social Security benefits is an increase of the federal income tax thresholds, which determine how much Social Security income will be reported as income in the coming year. This is because the “combined” income tax thresholds are not being indexed.
The fact that these values are not moved up because of inflation creates a “stealth income tax” on the Social Security benefits paid in the year. If your benefit income goes up because of COLA increases, you might move to a higher tax bracket. This will cause more of your benefit to be reported as income and taxed away. This “stealth tax” can take away some of the buying power of the Social Security benefits.
Conclusion
October is an important month for Social Security announcements. But it is also important to remember that what is not announced could be as or more important than what is announced. It is always a good idea to review the details and ask for help if you need it. Prepare now for what is coming next year!
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