Recently, the Social Security Administration announced two important changes that are going to affect both current and future retirees. Both changes relate to how much money you'll have in your pockets next year. Here's what you need to know.
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1. Current Social Security recipients are getting a cost-of-living adjustment
The first big announcement affects current retirees and others who are receiving Social Security benefits right now. According to an Oct. 10 announcement, everyone who is collecting Social Security benefits is going to get a 2.5% cost-of-living adjustment (COLA) in 2025. This is a bit smaller than the 2.6% average COLA that Social Security recipients have received over the past decade, according to the announcement.
COLAs happen in the majority of years, although they don't occur every year. They are automatically built into Social Security, and they're calculated based on a formula that looks at how a consumer price index changed in the third quarter of the year. If the price index shows inflation, then retirees get a benefits increase so their buying power does not change.
The 2.5% COLA that Social Security recipients will get in 2025 will result in the typical retiree getting around $50 more per month in their payments. The extra money will start showing up in your checks in January.
2. Current workers may owe more money in Social Security taxes
The other big announcement affects current workers, and specifically those who earn a higher income. It relates to how much of your income is taxed by the Social Security Administration.
In 2024, the "taxable maximum," or the maximum amount of income that is subject to Social Security tax, is $168,600. However, this amount will increase next year. It's going up to $176,100.
The taxable maximum also increases as a result of inflation and wage growth. As prices go up and people earn more money, they're taxed on a larger share of it. Since benefits are based on the amount you pay into the system, and you only get credit for income you earn up to the taxable maximum, this also means people being asked to pay more in 2025 will see a larger benefit later on in life as a result.
Of course, not very many people earn $168,600 or more per year, so they will not be affected by this change. Only those who have income above this threshold will be asked to pay more.
The current tax rate for Social Security is 6.2% paid by employees and 6.2% paid by employers, so that means these workers and their employers could each owe an extra $465 per year if they make at least $176,100. Any income above this threshold remains untaxed. This change will also go into effect in January 2025.
Both current retirees and future workers must understand the modified rules announced by the Social Security Administration, as seniors will have a little more money next year and high earners will have a little less. Start planning now for these changes, so you're prepared when 2025 comes around.
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