Retirees just received some good news. Last week, the Social Security Administration (SSA) announced a 2.5% cost-of-living adjustment (COLA) for next year. Monthly Social Security benefit payments will be larger beginning in January.
But there wasn't good news for everyone. Here's why there's bad news for millions of Americans in Social Security's 2025 COLA update.
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This bad news isn't about the Social Security COLA
First things first. The bad news I'm talking about in this case isn't related to the Social Security COLA. Retirees (and other Social Security beneficiaries) will indeed receive a 2.5% benefit increase. That said, there is at least some bad news related to the COLA for most retirees.
The problem is that Medicare Part B premiums are expected to increase at a faster clip than Social Security benefits. The actual Part B premiums for 2025 haven't been announced at the time of this writing. However, the Medicare Trustees report published earlier this year indicated that the standard monthly premium will likely jump by around 5.9% to $185.
What does this have to do with the Social Security COLA? Most Medicare Part B recipients have their premiums deducted from their Social Security benefits each month. Because of the higher Part B premiums, they won't actually see a 2.5% increase in the amount deposited into their banks.
An automatic tax increase
Again, though, that isn't the bad news I'm focused on. And this bad news won't impact retirees. It will instead affect millions of working Americans.
Social Security's 2025 COLA update didn't only address the upcoming benefits increase. The report also revealed that the maximum amount of earnings subject to the Social Security FICA payroll tax will increase from $168,600 to $176,100.
This tax hike wasn't pushed by the Biden administration. It didn't require congressional action this year, either. Every year, an automatic tax increase becomes effective as the Social Security taxable maximum is moved higher based on the increase in average wages.
How many people are affected by this change? Perhaps more than you might think. Exact numbers aren't available for the number of Americans who will make more than $168,600 this year and will have to pay higher FICA taxes in 2025. However, the top 10% of individuals in the U.S. have adjusted gross incomes of at least $169,800. With nearly 162 million people working in the country, we can estimate that in the ballpark of 16 million Americans will be impacted by the Social Security payroll taxable maximum increase.
A (small) silver lining
Is there any silver lining for the millions of people who will pay higher FICA taxes next year? Maybe a small one.
It's no secret that the Social Security trust funds are running out of money . Around 90% of the revenue flowing into these trust funds comes from payroll taxes. Without the payroll tax maximum increasing each year, the Social Security trust funds would be depleted even sooner than the current projection of 2035.
If you're one of the high-earners impacted by the bad news in Social Security's 2025 COLA update, you can perhaps find some small comfort in the fact that the extra taxes you pay will help keep Social Security solvent a little longer. With the clock ticking until the Social Security trust funds are exhausted, it's possible (if not probable) that Congress will seek to make even more income subject to FICA taxes in the not-too-distant future.
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