As we enter 2025, many of you might be outlining financial objectives and crafting your to-do lists. While doing so, don’t forget to pay attention to the changes in Social Security slated for this year, as they might affect you whether you’re currently employed or already enjoying retirement.

To assist with your preparations, I have highlighted three significant adjustments announced by the Social Security Administration (SSA) in October.

1. Social Security benefits are set to increase, thanks to the COLA

Let’s begin with one of the most awaited updates for Social Security next year — the annual cost-of-living adjustment (COLA). This adjustment helps beneficiaries retain their purchasing power from one year to the next.

In 2023, beneficiaries enjoyed a notable 8.7% COLA, followed by a smaller 3.2% in 2024. The anticipated increase for 2025 is a modest 2.5%, marking the smallest increase since 2021. Nevertheless, this adjustment is closely aligned with the average COLA of 2.6% over the past ten years.

So, what does this mean for your finances? On average, Social Security retirement benefits are set to rise by about $50 per month starting January 2025. However, when you take Medicare Part B payments into account, your actual net gain will be less.

While Social Security recipients await the yearly COLA, next year’s increase isn’t a major overhaul. In fact, a recent survey from Motley Fool revealed that 54% of retirees believe the 2025 COLA won’t adequately cover the rising costs of essentials.

The silver lining? A smaller adjustment indicates that inflation is stabilizing compared to the spikes seen in 2022 and 2023.

2. You can earn more before affecting your Social Security benefits

Are you a working individual receiving Social Security benefits? You’re in good company.

The average Social Security check was reported to be $1,925.46 as of November 2024, making it understandable why many retirees struggle to meet their expenses solely on that income. This situation is a significant factor behind why half of retirees are contemplating returning to work, according to the previously mentioned Motley Fool survey.

However, while working and receiving benefits, there’s a threshold on how much you can make before it impacts your benefits. One limit applies if you claim Social Security before reaching your full retirement age (FRA), which is 67 for individuals born in 1960 or later. Another earnings limit kicks in if you attain FRA in 2025.

Here’s the positive news: The earnings limits are set to rise in 2025, allowing you to make more money before Social Security benefits are reduced. The breakdown of the new limits is as follows:

• For early filers: If you take benefits prior to reaching FRA, the earnings limit will increase to $23,400 in 2025, up from $22,320 in 2024. If your earnings exceed this threshold, the SSA will deduct $1 from your benefits for every $2 you earn over that limit. For instance, if you expect to earn $40,000 in 2025, that surpasses the limit by $16,600, leading to a reduction of your Social Security benefits by $8,300 for the year.
• For those attaining FRA in 2025: A higher limit will apply, increasing to $62,160 in 2025, from $59,520 in 2024. For any earnings above this cap, the SSA will withhold $1 for every $3 earned.

If you have already reached your FRA, then you will no longer be subjected to the earnings test. Moreover, any benefits withheld earlier due to this earnings test will be reimbursed through increased monthly payments.

3. High earners will see an increase in Social Security taxes on more income in 2025

If you’re not yet retired and fall into the high-income bracket, it’s essential to be aware of Social Security’s maximum taxable earnings limit, which is set to rise in 2025. This means that a larger portion of your salary will be subject to Social Security taxes. While paying more taxes isn’t likely to be something you’re excited about, this additional revenue supports benefits for current and future retirees.

As of 2024, the taxable earnings ceiling is $168,600, but it will increase to $176,100 in 2025.

The government establishes a threshold each year indicating how much of your earnings can be taxed for Social Security. This cap is not adjusted for inflation like the COLA, but is instead aligned with changes in the national wage index.

The onset of a new year presents a great opportunity to evaluate your finances and prepare for the upcoming changes. Whether you’re enjoying retirement or still on the job, a little foresight can make navigating 2025 much easier.

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