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Millions of Americans' Social Security payments are expected to see a significant adjustment as 2025 approaches. For Social Security benefits and Supplemental Security Income (SSI) payments, the Social Security Administration (SSA) has announced a cost-of-living adjustment (COLA) of 2.5 percent. For beneficiaries, this adjustment is essential because it keeps their purchasing power stable and helps them stay up with inflation. This blog will explore the specifics of this rise, how it impacts associated taxes and benefits, and how it affects other facets of Social Security.
In order to offset the impacts of inflation, Social Security benefits are adjusted annually through the COLA. The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which tracks shifts in the cost of living, serves as its foundation. The COLA is set at 2.5 percent for 2025, which is just less than the 2.6 percent average rise over the previous ten years. Starting in January, Social Security retirement beneficiaries will get an average monthly boost of almost $50 as a result of this modification.
Each year the Social Security Administration publishes a Fact Sheet that includes the many values affected by the annual cost of living adjustment.
The COLA was created to prevent inflation from reducing the buying power of Social Security and Supplemental Security Income (SSI) benefits. The basis for determining a COLA is the percentage rise in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) between the third quarter of the previous year and the current year. There cannot be a COLA if there is no rise.
The Department of Labor's Bureau of Labor Statistics calculates the CPI-W. It is the legal metric that the Social Security Administration uses to determine COLAs.
As part of the 1972 Social Security Amendments, Congress passed the COLA clause, and in 1975, automatic yearly COLAs were implemented. Prior to that, Congress had to pass specific legislation in order to raise benefits.
Social Security began automatically disbursing yearly cost-of-living benefits in 1975. Legislation that links COLAs to the yearly increase in the Consumer Price Index (CPI-W) brought about the shift.
For comparison, the following are COLA adjustments for recent years:
This hike will show up in the paychecks of over 68 million Social Security recipients. On December 31, 2024, an additional 7.5 million SSI beneficiaries will start to receive higher benefits.
The rates for the Federal Insurance Contributions Act (FICA) tax, which pays for Medicare and Social Security, are not changing until 2025. Workers will continue to pay a 7.65 percent combined rate, which consists of 1.45 percent for Medicare (HI) and 6.20 percent for Social Security (OASDI). Self-employed people will pay 15.30 percent in total, which includes both employer and employee contributions.
However, the taxable maximum—the highest amount of income subject to Social Security tax—will rise from $168,600 in 2024 to $176,100 in 2025. This implies that when average salaries rise, wealthier incomes will make larger contributions to Social Security.
One metric used to assess eligibility for Social Security payments is the quarter of coverage, also referred to as a Social Security credit. The earnings needed to obtain one credit will rise from $1,730 to $1,810 in 2025. In order to be eligible for retirement, disability, and survivor benefits, workers must accrue a minimum of four credits annually.
The retirement earnings test establishes how much a person can make before their Social Security payments are deducted if they have not yet attained full retirement age. From $22,320 annually, or $1,860 monthly, in 2024, the exempt amount will rise to $23,400 annually, or $1,950 monthly, in 2025. Benefits will be withheld at the rate of $1 for every $2 earned beyond this limit.
There will also be a change to the maximum Social Security income for people who retire at full retirement age. The rise in the taxable limit and the COLA will typically result in greater maximum benefits for new retirees in 2025, however the precise amount may differ depending on individual earnings history. Benefits will continue to be in line with salary growth and inflation thanks to this change. The monthly limit for 2025 is $5,180, up from $4,960 in 2024.
These modifications are essential to ensuring that Social Security continues to be a dependable source of income for millions of Americans as the cost of living rises. Making the most of your Social Security payments requires that you be aware of these changes, regardless of whether you are a current beneficiary or are preparing for retirement. If you have any questions, please contact this office.