More than 50 million retirees will receive a Social Security benefit in April 2024. These monthly payments are often their largest source of income. In fact, a recent Gallup poll found that 88% of retirees rely on Social Security to some extent, and 60% said the benefits are a “major source of income.”
The Social Security program undergoes certain changes each year to adjust benefits for inflation and general wage levels. Given the important role that benefits play in retirement, it’s imperative that beneficiaries (and future beneficiaries) stay informed. However, a recent survey by the Nationwide Retirement Institute shows that many Americans misunderstand basic aspects of the program.
Here are three changes to Social Security in 2025 that may surprise many Americans.
1. Social security benefits will be adjusted to the cost of living in 2025
The Nationwide Retirement Institute recently reported that 70% of adults surveyed incorrectly agreed with this statement: “Social Security is not protected from inflation.” This statement is false. Social Security payments are adjusted annually for the cost of living to protect the purchasing power of benefits.
The COLA applied to benefits in a given year is based on the change in a portion of the Consumer Price Index (CPI) during the third quarter of the previous year, which is the three-month period between July and September. Therefore, the Social Security Administration cannot determine the official COLA for 2025 until the September CPI data is released in mid-October.
However, based on current consumer price trends, the Senior Citizen League expects benefits to increase by 2.7% in 2025. However, the nonprofit senior advocacy group has already revised its forecast upward several times in recent months due to higher-than-expected inflation, meaning the official COLA for 2025 could be higher.
Assuming Social Security benefits actually receive a 2.7% COLA next year, average monthly benefits for retirees would increase by about $51, bringing the total amount to $1,967.
2. Some employees will have more social security contributions deducted from their salaries in 2025
According to Nationwide, 74% of adults surveyed incorrectly agreed with the following statement: “Employees pay Social Security taxes on all of their income.” This statement is false. Current law limits the income that is subject to Social Security payroll taxes. The maximum taxable income limit is $168,600 in 2024, meaning income above that amount is not subject to taxation by the Social Security program.
The maximum taxable income limit is adjusted annually based on changes in the national average wage index. The official limit for 2025 will be released in mid-October, but the Social Security Board of Trustees estimates that the maximum taxable amount next year will be $174,900. Under this scenario, workers will pay up to $391 more in Social Security contributions in 2025.
To be more specific, the tax rate is generally 6.2%, which means that a worker earning over $174,900 will have $10,844 withheld from their pay next year. But that same worker will have $10,453 withheld from their pay this year, so the difference is $391.
3. Some welfare recipients will be denied benefits in 2025
According to Nationwide, 46% of adults surveyed falsely disagreed with the following statement: “Some of your benefits may be withheld from you if you full retirement age.” This statement is true.
In fact, workers receiving benefits can have part of their benefits temporarily withheld if (1) they are not yet at full retirement age and (2) their income exceeds thresholds known as the Pension Income Test allowances. There is a lower limit that applies to beneficiaries who are not yet at full retirement age throughout the year and an upper limit that applies to beneficiaries who reach full retirement age during the year.
Currently, the floor is $22,320 and the ceiling is $59,520. This means that beneficiaries who have not yet reached full retirement age in 2024 will have $1 of benefits withheld for every $2 of income that exceeds the floor. Similarly, beneficiaries who reach full retirement age in 2024 will have $1 of benefits withheld for every $3 of income that exceeds the ceiling.
The official retirement income test exemption amounts for 2025 will be calculated based on changes in the national average wage index and released in mid-October. However, the Social Security Board of Trustees estimates that the lower limit will be $23,280 and the upper limit will be $61,800. In other words, beneficiaries under full retirement age can earn more before their benefits are cut off next year.
Importantly, the pension income test level no longer matters once a pensioner reaches full retirement age. In addition, any benefits taken before full retirement age are gradually repaid, so pensioners typically get most or all of their money back over a normal lifetime.
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3 Big Changes to Social Security in 2025 Could Surprise Many Americans was originally published by The Motley Fool