3 Big Social Security Changes Set for 2025 May Surprise Many Americans
Social Security is set to undergo several changes next year, and a recent survey suggests many Americans will be surprised by the changes.
In April 2024, more than 50 million retired workers received Social Security benefits. These monthly expenses are often their biggest source of income. In fact, a recent survey by Gallup found that 88% of retirees rely on Social Security to some degree, and 60% say the benefit is their “main source of income.”
The Social Security program undergoes certain changes each year to keep benefits in line with inflation and prevailing wage levels. Given the important role benefits play in retirement, it is important to keep beneficiaries (and soon-to-be beneficiaries) informed. But a recent survey by the Nationwide Retirement Institute found that many Americans misunderstand basic aspects of the program.
Here are three Social Security changes in 2025 that will surprise many Americans.
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1. Social Security benefits will receive a cost-of-living adjustment (COLA) in 2025.
The Nationwide Retirement Institute recently reported that 70% of adults surveyed incorrectly agreed with the statement, “Social Security does not protect against inflation.” That statement is false. Social Security payments are subject to annual cost-of-living adjustments (COLAs) to protect the purchasing power of your benefits.
The COLA that applies to benefits in a particular year is based on how a subset of the Consumer Price Index (CPI) changed in the third quarter of the previous year (the three-month period between July and September). To that end, the Social Security Administration cannot determine an official 2025 COLA until September CPI data is released in mid-October.
However, based on current consumer price trends, The Senior Citizen League estimates that benefits will increase by 2.7% in 2025. But the nonprofit senior advocacy group has already revised its forecasts higher several times in recent months due to higher-than-expected inflation. The official 2025 COLA may be higher.
But assuming that Social Security benefits actually receive the 2.7% COLA next year, a retired worker’s average monthly benefit would increase by about $51, for a total of $1,967.
2. Some workers will have more Social Security taxes withheld from their paychecks in 2025.
According to Nationwide, 74% of adults surveyed incorrectly agreed with the statement, “Workers pay Social Security taxes on all their earnings.” If the statement is false. Current law places a cap on income subject to Social Security payroll taxes. The maximum taxable income limit for 2024 is $168,600. This means that any income above that amount will not be taxed by Social Security.
The maximum taxable income limit is adjusted annually based on changes in the National Average Wage Index. Official limits for 2025 will be announced in mid-October, but the Social Security Commission estimates the taxable maximum next year will be $174,900. In this case, workers would pay up to $391 more in Social Security taxes in 2025.
To elaborate, the tax rate is typically 6.2%. That means workers earning more than $174,900 will have $10,844 withheld from their paychecks next year. However, the employee will have $10,453 withheld from his or her paycheck this year. The difference is $391.
3. Some Social Security beneficiaries will have their benefits withheld in 2025.
According to Nationwide, 46% of adults surveyed incorrectly agreed with the following statement: “If you continue to work before your full retirement age, some of your benefits may be withheld.” That’s true.
Workers receiving Social Security can actually have part of their benefits temporarily withheld if (1) they are under full retirement age and (2) their earnings exceed a threshold known as the retirement earnings test exemption amount. There is a lower limit that applies to beneficiaries who are below full retirement age during the year and an upper limit that applies to beneficiaries who reach full retirement age during the year.
The current lower limit is $22,320 and the upper limit is $59,520. That means beneficiaries under full retirement age in 2024 will have $1 of their benefits withheld for every $2 they earn over the floor. Similarly, beneficiaries who reach full retirement age in 2024 will have $1 of their benefits withheld for every $3 they earn over the cap.
The 2025 Official Retirement Income Test Exemption amount will be calculated based on changes in the national average wage index and will be published in mid-October. However, the Social Security Commission estimates that the lower limit will be $23,280 and the upper limit will be $61,800. Put another way, beneficiaries under full retirement age can earn more before their benefits are withheld next year.
Importantly, once a Social Security beneficiary reaches full retirement age, the retirement earnings test amount no longer matters. Additionally, benefits withheld before full retirement age are repaid progressively, so retired workers typically recover most or all of the amount over their normal lifespan.
