Social Security benefits will see several changes in 2025 that retirees should be aware of. One of the most significant changes is the increase in the full retirement age. This means that people will have to wait longer to receive their full benefits.
Another change is the increase in the cap on earnings subject to Social Security payroll taxes. Higher-income earners will pay more into the system, which will help keep it solvent. Cost-of-living adjustments (COLA) are also expected to be modified in 2025.
These adjustments aim to keep retiree benefits in line with inflation. The changes could result in higher monthly benefits for retirees. There may also be changes to spousal and survivor benefits.
The formulas used to calculate these benefits could be revised to improve fairness and financial sustainability. Finally, new provisions may be introduced to offer higher benefits to the oldest seniors, such as those over 85. This change aims to provide additional support during the later years of retirement when healthcare and other costs tend to rise.
Rachel Christian, a Certified Educator in Personal Finance (CEPF) with FinCert, emphasizes the importance of understanding these changes. “Keeping up-to-date with Social Security changes is crucial for anyone nearing retirement,” she advises. Starting in 2025, the maximum Social Security payout is set to rise, reflecting adjustments for inflation and cost of living.
The cost of living adjustment (COLA) for 2025 is set at 2.5%, increasing the maximum monthly benefit from $3,822 to $4,018.
Social Security to see big changes
To receive the maximum Social Security benefit, retirees must meet certain criteria.
Their earnings should be high enough to qualify for the maximum payout, and they need to reach Full Retirement Age (FRA), which is currently 70 years old. Annual Social Security benefit increases in recent years have ranged from 0% to 8.7%. Social Security recipients, including the roughly 1.5 million living in Arizona, will receive a 2.5% COLA, starting in 2025.
This adjustment will raise the average monthly benefit by around $48, with the average payment currently standing near $1,920. Cost-of-living adjustments (COLAs) are designed to help Social Security recipients keep up with rising prices for essential goods and services such as food, shelter, and transportation. The increase applies to both retirees and recipients of Supplemental Security Income (SSI).
Some 68 million Americans will receive COLAs on their retirement benefits, and 7.5 million will get them on SSI benefits. COLAs for Social Security reflect changes in an inflation gauge known as CPI-W, the Consumer Price Index for Urban Wage Earners and Clerical Workers. This index measures inflation from the third quarter of one year to the third quarter of the next.
Social Security is the primary source of income for 40% of older Americans, according to Jo Ann Jenkins, AARP’s CEO. COLAs are crucial for these individuals, ensuring that they “have an inflation-protected source of income in retirement.”
Lisa Featherngill, national director of wealth planning at Comerica Wealth Management, suggests closely examining cash inflows and outflows, especially before holiday shopping pressures arise. She recommends considering whether expenses can be cut or better deals found, particularly for services like cable television, auto insurance, or home insurance.
COLAs add significant costs to the Social Security program, exacerbating its already precarious funding status. Without reforms, Social Security is expected to exhaust its trust fund by 2033, at which point benefits could be cut to 79 cents on the dollar. Congress has the option to shore up the program by cutting benefits, raising taxes, or a combination of the two, but no meaningful action has been taken yet.
