Social Security has been around for decades. But that doesn't mean everything about it stays the same from year to year.
Beginning January 1, Social Security is expected to undergo some big changes -- ones you should start preparing for sooner rather than later. Here's what to expect in about four months -- and how to gear up.
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Change #1: A not-so-great cost-of-living adjustment
Each year, Social Security benefits are eligible for a cost-of-living adjustment (COLA), the purpose of which is to help recipients maintain their buying power as living costs increase. But so far, the news on next year's COLA isn't great.
Based on the most recent estimate, it's looking like 2025's Social Security COLA will be 2.57%. There's still room for that number to wiggle as we await third quarter inflation data, which is what Social Security COLAs are based on. But all told, it's likely that 2025's COLA will be less generous than 2024's 3.2% increase.
How to prepare for a smaller Social Security COLA in 2025
A smaller Social Security raise won't necessarily upend your budget if you're making ends meet right now. That's because 2025's COLA will only add to your monthly income.
Plus, a smaller 2025 COLA is an indication that inflation is cooling. That alone is helpful, as it means you may not be looking at huge jumps in your weekly spending.
But even so, it's a good idea to take steps to ensure that you're able to manage well financially in the new year. To that end, do a spending assessment and see if there's room to cut back on costs. You may, for example, decide that based on the little driving you do, it's more economical to get rid of your vehicle and ask for rides or summon a car service when you can't get where you need to go on foot or by public transportation.
There may also be some strategic steps you can take to increase your income. If your home has more square footage than what you need, you can consider renting a portion of it out for extra money. Or, you can look to monetize a hobby you enjoy.
If you typically spend time most days playing your guitar, see if there's a coffee shop in town that lets you set up shop for a few hours. Even if you're not paid an hourly wage, you might collect some nice tips.
Change #2: A higher wage cap for tax purposes
Social Security gets the bulk of its funding from payroll taxes. But workers don't necessarily pay Social Security tax on every dollar they earn. Rather, there's a wage cap established each year that determines how much income is taxed to fund Social Security.
This year, the wage cap is $168,600. Next year, it's likely to rise in line with inflation.
If you don't expect to earn more than $168,600 in 2025, then this change won't affect you. Otherwise, expect to pony up.
How to prepare for a higher tax burden in 2025
If you're in a position where your Social Security tax burden is likely to rise in 2025, it may be that you're doing fairly well financially based on your income. But depending on where you live and just how much above the wage cap you earn, you may also be just scraping by. A salary of $178,000 in a major city where the average starter home costs $800,000, for example, doesn't mean you're rolling in money.
One way to help offset an increase in taxes is to max out contributions to a retirement plan like an IRA or 401(k). And also, see if you qualify for a health savings account (HSA), which also allows for tax-free contributions. If not, you may be allowed to contribute to a flexible spending account (FSA).
FSAs don't offer as much benefit as HSAs because they need to be used up on an annual basis and unused funds can't be invested. But they still allow you to shield some income from the IRS. And while FSAs are often associated with healthcare spending, there's a dependent care version you may qualify for if you have children and pay for child care. That's another opportunity to exempt some income from taxes.
Change #3: A higher earnings threshold for accruing work credits
Collecting Social Security in retirement isn't a given. To qualify for benefits as a senior, you'll need to accrue 40 work credits in your lifetime.
You earn these credits by making money and paying Social Security taxes on your wages. And you can rack up a maximum of four work credits per year.
The current value of a work credit for Social Security is $1,730. But in 2025, that's likely to increase in line with inflation, which means it'll take more earnings to qualify for work credits.
How to prepare for a change in work credit earnings
A rise in the value of Social Security work credits probably won't impact you if you work full-time. It's gig and part-time workers who may have to be more mindful of this change.
As of now, we don't know what the value of a Social Security work credit will be in 2025. That information should be released in October. Once that happens, do the math to see how much income it takes to get your four credits for the year if that's what you're after.
You may have a tight schedule that makes it hard to fit in work, such as if you're a stay-at-home parent to young children or an older worker with health issues who's a few credits shy of qualifying for Social Security. But once you know what numbers you're looking at, you can try to make things work, whether by adjusting your schedule or, in the case of health issues that are holding you back, seeking out work that's more suitable.
It's hard to believe that 2025 is a mere four months away. But given that, now's the time to start anticipating some big Social Security changes -- and to begin preparing accordingly.
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