Social Security remains a highly debated issue in the political sphere, mainly due to concerns about potential benefit cuts if the program is not reformed. These cuts could significantly impact the millions of seniors who rely on Social Security to maintain their standard of living. Additionally, millions more Americans who have contributed to Social Security over the years might also face reduced benefits when it’s time for them to collect. Although major reforms to Social Security are unlikely before the end of 2024 or the presidential election, the program undergoes routine annual adjustments that could catch many by surprise if they are not vigilant. Given the program’s importance to both retirees and current workers, staying informed about these changes is crucial for effective retirement planning. Below are three significant Social Security changes scheduled for January.
Benefit Increase for Recipients
Social Security benefits are adjusted each year to account for inflation through a process known as the cost-of-living adjustment (COLA). The Social Security Administration (SSA) determines this adjustment by examining the growth in a specific subset of the Consumer Price Index (CPI) during the third quarter of each year, specifically the CPI for Urban Wage Earners and Clerical Workers (CPI-W). While the final figures for the 2025 COLA won’t be available until October, when the Bureau of Labor Statistics releases its September inflation data, projections have already started emerging. According to the latest estimates from the Senior Citizens League, a nonpartisan advocacy group for seniors, the COLA for 2025 is expected to be around 2.6%.
This projected increase represents a slowdown compared to recent years, which have seen larger spikes in inflation. However, a more moderate inflation rate is generally better for the purchasing power of Social Security benefits than the scenario of runaway inflation. A 2.6% increase would surpass the Federal Reserve’s long-term inflation target of 2%, potentially improving the financial situation for seniors dependent on these benefits.
Gradual Increase in Full Retirement Age
Another key change on the horizon is the ongoing gradual increase in the full retirement age (FRA), which is the age at which an individual becomes eligible to receive full Social Security benefits. This adjustment stems from a long-term policy enacted by Congress in 1983, designed to gradually raise the FRA until it reaches 67 for those born in 1960 or later.
Starting in 2025, individuals born in 1958 will reach their FRA at 66 years and 8 months, while those born in early 1959 will reach their FRA at 66 years and 10 months. The full retirement age plays a crucial role in determining the monthly benefit amount for beneficiaries. This is true even for those who choose to claim benefits either before or after their FRA, as the age at which one claims impacts both early retirement penalties and delayed retirement credits. Understanding your specific FRA is essential for making informed decisions about when to begin receiving benefits.
Potential Increase in Social Security Taxes for Some Workers
Social Security taxes are typically levied at a rate of 6.2% of wages, with employers matching this contribution for a total of 12.4%. However, there is a cap on the amount of earnings subject to this tax, known as the maximum taxable earnings limit. This limit is adjusted annually to account for changes in wage inflation.
For 2024, the maximum taxable earnings is set at $168,600, meaning any income above that level is exempt from Social Security taxes. While the SSA will not finalize the 2025 maximum taxable earnings limit until October, the increase is expected to be modest given the recent decline in inflation. Nevertheless, high-income earners should prepare for a possible increase in their tax liability if their income exceeds the 2024 limit.
FAQs:
How often is the cost-of-living adjustment (COLA) for Social Security benefits made?
The COLA for Social Security benefits is adjusted annually based on inflation data from the third quarter of the year.
What is the full retirement age for someone born in 1960 or later?
For individuals born in 1960 or later, the full retirement age is 67.
Will high-income earners see an increase in Social Security taxes every year?
High-income earners may see an increase in Social Security taxes annually, as the maximum taxable earnings limit is adjusted each year to reflect changes in wage inflation.