For the last 85 years, Social Security has been providing a financial foundation for aging Americans who could no longer do so for themselves. Based on an analysis from the Center on Budget and Policy Priorities, this program is responsible for pulling 22.7 million people out of poverty each year — including 16.5 million adults aged 65 and over.
While Social Security has been a pillar for more than eight decades, it isn’t static. Updates are made to this iconic program on an annual basis. With the calendar officially shifting to the new year, six meaningful Social Security changes take effect today.
Image source: Getty Images.
The most anticipated announcement each year for Social Security is its cost-of-living adjustment, or COLA.
The COLA is the mechanism by which the Social Security Administration (SSA) accounts for the effects of inflation on beneficiaries. For example, if the collective price for a basket of goods and services regularly purchased by retirees rises by 2%, 3%, or 5%, Social Security benefits should, ideally, increase by a commensurate amount to avoid a loss of purchasing power.
In 2025, Social Security checks will enjoy a 2.5% cost-of-living adjustment. Although this is the smallest COLA in four years, it still marks the fourth consecutive year where COLAs are above the norm, when compared to an average increase over the last 15 years of approximately 2.3%.
In nominal-dollar terms, the average retired worker can expect their monthly check to rise by $49 to $1,976 in the new year. By comparison, the average benefit check for workers with disabilities and survivor beneficiaries is expected to climb by $38 per month to $1,580 and $1,551, respectively, in 2025.
While a fourth straight above-average COLA probably sounds great on paper, stubbornly high shelter and medical-care expenses, coupled with a rapidly rising Medicare Part B premium, are likely to bog down the purchasing power of a Social Security dollar, yet again.
Something worth noting about these changes is they impact more than just existing beneficiaries. The start of a new year means high-earning workers may be on the hook for a bigger tax bill.
Social Security is primarily funded by the 12.4% payroll tax collected on earned income (wages and salary, but not investment income). In 2024, earned income between $0.01 and $168,600 was subject to the payroll tax.
Beginning today, all earned income between $0.01 and $176,100 is applicable to the 12.4% payroll tax. For those curious, the upper-bound figure, known as the maximum taxable earnings cap, adjusts in lockstep with the percentage increase in the National Average Wage Index most years.
The silver lining is that roughly 94% of workers will earn less than the maximum taxable earnings cap and are, therefore, unaffected by this change. But for the 6% of higher-earning workers, your payroll tax liability could climb by up to $930 if self-employed or $465 if employed by someone else in the new year.
While well-to-do workers are probably going to have to open their wallets a bit wider, high-earning retirees are in line to receive a beefier monthly benefit this year.
In 2024, the maximum monthly benefit for a worker at full retirement age was $3,822. Full retirement age represents the age at which a worker becomes eligible to receive 100% of their monthly benefit. In 2025, this maximum monthly check at full retirement age is rising by $196 to $4,018.
Only about 2% of beneficiaries reach this maximum monthly benefit from Social Security. The reason this figure is so small is because three criteria need to be met to achieve it:
A retired-worker beneficiary needs to wait until full retirement age before collecting their benefit.
Beneficiaries need to work a minimum of 35 years, given that the SSA relies on their 35 highest-earning, inflation-adjusted years when calculating their benefit at full retirement age.
Retired workers would need to have met or surpassed the maximum taxable earnings cap in all 35 years used by the SSA to calculate their monthly benefit.
Image source: Getty Images.
The new year also brings meaningful changes to workers who began collecting their Social Security checks prior to reaching full retirement age (i.e., early filers).
The Social Security program encourages retirees to wait to claim their payouts with a financial incentive. For every year a worker waits to begin collecting their payout, beginning at age 62 and continuing until age 70, their monthly benefit can grow by as much as 8%. But for the earliest filers at age 62, it means accepting a permanent reduction to their monthly payout of 25% to 30%, depending on their birth year.
But this isn’t the only potential penalty for early filers. The retirement earnings test allows the SSA to withhold some or all of an early filer’s benefits, depending on their income.
Early filers who didn’t reach their full retirement age in 2024 had $1 in benefits withheld for every $2 in earned income above $22,320, which works out to $1,860 per month. This year, early filers who won’t hit their full retirement age can earn up to $23,400 ($1,950 per month) without any withholding kicking in.
The withholding threshold is markedly different for workers who will reach their full retirement ages at some point in 2025. For this category of early filers, $1 in benefits can be withheld for every $3 in earned income above $62,160 ($5,180 per month) in the current year. This is up from $59,520 ($4,960 per month) in 2024.
Once a worker reaches their full retirement age, the retirement earnings test is no longer applicable. Further, previously withheld benefits are returned in the form of a higher monthly benefit once a worker reaches their full retirement age.
Early filers aren’t the only category of beneficiary set to see changes in income thresholds in the new year. The program’s more than 7.2 million workers with disabilities also have earned income ceilings they’ll want to be aware of.
Last year, non-blind workers with disabilities were allowed to earn up to $1,550 per month without having their payouts halted by the SSA. In the new year, they’ll be allowed to earn $70 more per month, or $1,620, without having their disability benefits being stopped.
This year-over-year nominal-dollar increase is even more pronounced for blind workers with disabilities. The ability to generate earned income without having Social Security disability benefits cease increases by $110 per month in the current year to $2,700 for blind workers with disabilities.
Last but certainly not least, it’s going to be just a bit tougher for workers to qualify for Social Security coverage, which includes potential retirement, survivor, and disability benefits.
Despite what you may have read or heard elsewhere, Social Security benefits aren’t a right or a given just because you’re an American citizen. Benefits are traditionally earned through work, with a cumulative 40 lifetime work credits needed to receive a retired-worker benefit. A maximum of four credits can be earned per year.
The good news for working Americans, and especially part-timers, is that the bar to earn these valuable lifetime credits is set relatively low. In 2024, it took $1,730 in earned income to receive one work credit. Thus, $6,920 in earned income ($1,730 X 4) is all that was needed to max out your work credits last year.
In the new year, it’ll take $1,810 in earned income to receive one lifetime work credit and $7,240 to collect the maximum of four work credits.
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6 Social Security Changes That Take Effect Today was originally published by The Motley Fool
