Recently, the Social Security Administration has publicized two important updates that will influence the finances of both existing retirees and those planning to retire in the future. Here’s what you should be aware of.

1. Retirees will receive a cost-of-living adjustment

The first major update pertains to current retirees and others currently receiving Social Security benefits. According to their announcement on October 10, individuals receiving benefits will see a 2.5% increase due to cost-of-living adjustments (COLA) in 2025. This increase is slightly lower than the 2.6% average COLA that Social Security beneficiaries have received over the past ten years.

COST-of-living adjustments are typically implemented in most years, though not every year. They are integrated into the Social Security system and calculated based on shifts in the consumer price index for the third quarter of the year. If inflation is observed in the price index, retirees receive an increase in benefits to maintain their purchasing power.

The 2.5% COLA will mean that the average retiree will receive an additional $50 per month starting in January.

2. Higher earners may face increased Social Security taxes

The second significant update will concern current workers, specifically those with higher incomes, as it relates to the taxation of income by the Social Security Administration.

This year, the maximum amount of income subject to Social Security tax, known as the “taxable maximum,” stands at $168,600. This threshold, however, will increase to $176,100 next year.

This adjustment to the taxable maximum comes in response to inflation and wage growth. As living costs rise and people’s incomes increase, they will be taxed on a larger portion of their earnings. Since benefits are determined by contributions made over one’s career, individuals subject to the higher tax in 2025 can expect to receive increased benefits when they retire.

It’s important to note that only a small percentage of individuals earn above $168,600 annually, so most workers will not be directly affected by this change. Only those with incomes exceeding this limit will see an increase in their contributions.

Currently, the Social Security tax rate is 6.2% for both employees and employers. This means that workers earning at least $176,100 could incur an additional charge of approximately $465 per year. Income beyond this amount remains untaxed. These adjustments will be implemented starting January 2025.

It’s crucial for both current retirees and future employees to grasp the new regulations set forth by the Social Security Administration, as retirees will have a modest increase in their income, while high earners may need to contribute a little more. Begin planning for these changes now to ensure a smooth transition into 2025.

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