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Xerxes Nabong, CFP®, CDFA®
Philip M. Maliniak, CRPC®
Nicole Brown-Griffin, CFP®, CDFA®, EA
Aaron Petty, Client Associate
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2025 Social Security Updates
As we prepare for 2025, staying informed about Social Security updates is essential for making the most of your financial strategy. This year brings changes to cost-ofliving adjustments, taxable earnings caps, and income thresholds that can influence your retirement plans, whether you’re collecting Social Security now or anticipating benefits in the future. In this newsletter, we outline key Social Security changes for the coming year to help you approach 2025. As always, your team at Wealth Avenue is here to help you navigate these updates and optimize your retirement and financial strategies.
1. 2025 Cost-of-Living Adjustment (COLA)
Starting in January, Social Security and Supplemental Security Income (SSI) beneficiaries will see a 2.5% increase in their monthly benefits due to inflation adjustments. This increase, based on the Consumer Price Index (CPI-W), helps maintain purchasing power amid rising costs.
2. Tax Rates Remain the Same
The combined tax rates for Social Security and Medicare will remain unchanged for 2025:
- Employee Tax Rate: 7.65%, including 6.20% for Social Security (up to a specific earnings cap) and 1.45% for Medicare on all earnings.
- Additional Medicare Tax: High earners (above $200,000 for individuals and $250,000 for couples) will continue to pay an additional 0.9% in Medicare tax on income over these thresholds.
- Self-Employed Tax Rate: 15.30%, which covers both employee and employer portions (12.4% for Social Security and 2.9% for Medicare on all earnings).
These rates contribute to Social Security and Medicare funding, ensuring the sustainability of benefits for future retirees.
3. Maximum Taxable Earnings Increase
For 2025, the Social Security (OASDI) taxable earnings cap will rise to $176,100 from $168,600 in 2024.
- What This Means: Income above $176,100 will not be subject to Social Security tax, though Medicare tax (1.45%) applies to all earnings without a cap. This adjustment ensures higher earners contribute proportionally up to the new limit, supporting Social Security funding.
4. Retirement Earnings Test Exempt Amounts
If you plan to work while collecting Social Security, here’s how much you can earn before benefits may be reduced:
- Under Full Retirement Age: You can earn up to $23,420/year ($1,950/month) before benefits are reduced by $1 for every $2 over this limit.
- Year of Reaching Full Retirement Age: Earnings up to $62,160/year ($5,180/month) are allowed, with benefits reduced by $1 for every $3 over this limit, applying only to months before reaching full retirement age.
- After Full Retirement Age: No earnings limit applies, so benefits are not reduced regardless of your earnings.
5. Quarter of Coverage Requirement
To qualify for Social Security benefits, you accumulate “quarters” of coverage based on your annual earnings. In 2025, earning $1,810 qualifies you for one quarter of coverage, up from $1,730 in 2024. This information is particularly relevant if you work in a system that doesn’t participate in Social Security but provides pension benefits, such as CalPERS or CalSTRS. Accumulating 40 quarters of coverage (equivalent to about 10 years of work) makes you eligible for Social Security benefits, though your benefit amount may be limited since it’s based on fewer years of earnings (10 years versus the 35- year average typically used to calculate benefits).
Additionally, if you receive a pension from non-Social Security-covered work, your Social Security benefit may be affected by the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO). The WEP can reduce your Social Security benefit if you also receive a pension from a job where Social Security taxes were not withheld, while the GPO may reduce spousal or survivor benefits. These provisions are in place to prevent “double-dipping” and ensure fair benefit distribution. Understanding these rules helps you plan and maximize your retirement income sources effectively.
6. Estimated Monthly Benefit Changes (Post-COLA)
The 2.5% cost-of-living adjustment (COLA) for 2025 will increase monthly Social Security benefits across various recipient categories. For all retired workers, the average monthly benefit will rise from $1,927 to $1,976. An aged couple, with both spouses receiving benefits, will see their combined benefits increase from $3,014 to $3,089. Widowed mothers with two children will receive an increase from $3,669 to $3,761, while aged widows or widowers alone will see their benefits go from $1,788 to $1,832. For disabled workers with families, benefits will increase from $2,757 to $2,826, and for all disabled workers, the average benefit will rise from $1,542 to $1,580. This adjustment helps beneficiaries maintain purchasing power as living costs rise.
For Those Not Yet Collecting Social Security
Even if you’re not currently receiving benefits, understanding these changes helps with long-term planning and preparation:
- Planning Retirement Income: Understanding COLA adjustments provides insight into how future Social Security benefits will be adjusted for inflation, helping you estimate retirement income and plan supplementary income sources.
- Impact of Tax Rates and Earnings Cap: The Social Security tax only applies to income up to the $176,100 cap. Knowing this can help you plan around these thresholds if you are a high earner. Additionally, understanding how earnings affect contributions can help you project future benefits.
- Anticipating Earnings Limits: If you plan to work while collecting Social Security in the future, it’s helpful to know earnings test limits, which could reduce your benefits if you’re below full retirement age. Planning around these thresholds can help avoid potential benefit reductions.
- Earning Quarters of Coverage: Each year you work builds towards Social Security eligibility. The quarter of coverage amount ($1,810 in 2025) indicates how much you need to earn to receive credits, which is helpful if you’re considering career breaks or job changes.
- Budgeting for Future Retirement: Knowing estimated benefit increases helps shape your retirement savings and ensures your budget aligns with anticipated Social Security income.
Understanding these updates now allows you to make strategic decisions that will maximize your future Social Security benefits. For personalized guidance on how these changes might impact your financial plan, please reach out to the Wealth Avenue team. We’re here to help you navigate each step toward a secure and comfortable retirement.
Your Team at Wealth Avenue,
Note: This newsletter is for informational purposes only and is not endorsed or approved by the Social Security Office or any Government Agency. Information is sourced from reliable, publicly available data.
