FINANCIAL PLANNING TIDBITS: SOCIAL SECURITY INCREASES FOR 2025

SUMMARY

While inflation numbers have started to ebb compared to the last two years, the Social Security Administration acknowledged rising prices with increases in both benefit- and earnings-related programs.

COST-OF-LIVING ADJUSTMENT

The Social Security Administration (SSA) recently announced a 2.5% cost-of-living adjustment (COLA) for 2025 Social Security benefits. This increase is designed to help recipients keep pace with inflation and rising costs of essential goods and services. While not the largest COLA in recent years, it offers a welcome boost for those relying on Social Security benefits as a significant part of their income. For example, if you’re receiving the average Social Security retirement benefit of around $1,800 per month, you could expect your benefit to increase by about $45 per month starting in January 2025.

MAXIMUM TAXABLE EARNINGS RISING

Currently, earned income up to $168,600 is subject to Social Security taxes, but that cap will rise to $176,100 in 2025. Earnings beyond this threshold will not be taxed for Social Security purposes, though there is no income limit for Medicare taxes.

For high earners, this means they will pay Social Security taxes on an additional $7,500 of income next year, translating into potentially higher contributions. While it may increase the immediate tax burden, it can also result in larger future benefits for those still working.

EARNINGS TEST EXEMPTION FOR EARLY RETIREES INCREASING

For people who collect Social Security before reaching full retirement age but continue to earn an income, there’s another important update. The earnings test exemption threshold will rise from $22,320 per year ($1,860 per month) to $23,400 per year ($1,950 per month). This means if you are under full retirement age and earning income, you can make up to $23,400 annually without seeing a reduction in your Social Security benefits starting in 2025.

For those earning above this amount, some benefits may be withheld. Specifically, for every $2 earned over the limit, $1 in benefits will be withheld. However, once you reach full retirement age, the SSA will recalculate your benefits to account for any money withheld, so you won’t lose out on those benefits entirely. Additionally, once you reach full retirement age, there’s no limit to how much you can earn without impacting your Social Security checks.

Whether you’re already retired or nearing retirement, it’s a good idea to review how these adjustments might affect your financial planning in the new year. To review your financial plan, or to build one if you haven’t already, please reach out to the Team at Day Hagan.

Natalie G. Brown, CFP®
Director of Client Services & Financial Planning
Day Hagan Private Wealth

—Written 11.26.2024.

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