As 2025 approaches, it’s time to think about your financial goals and responsibilities. One important area to monitor is the upcoming changes to Social Security, which can influence both workers and retirees substantially.

Here are three significant updates announced by the Social Security Administration (SSA) in October that you should consider.

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1. Social Security Benefits Will See a Cost-of-Living Adjustment

The first significant change for 2025 is the annual cost-of-living adjustment (COLA), which aims to help beneficiaries maintain their buying power.

In 2023, the COLA soared by 8.7%. For 2024, it settled at 3.2%. By 2025, anticipate a more modest increase of 2.5%, marking the smallest rise since 2021. Nonetheless, this adjustment is quite close to the average of 2.6% we’ve seen over the last ten years.

This means that starting in January 2025, the average Social Security retirement benefit will increase by about $50 per month. However, with Medicare Part B costs factored in, the actual benefit gain may be less significant.

Many retirees are looking forward to this increase, yet more than half (54%) from a recent Motley Fool survey believe the COLA won’t cover the rising costs of everyday essentials. On the upside, a lower adjustment reflects easing inflation compared to the highs of 2022 and 2023.

2. Income Limits Rise for Working Beneficiaries

If you are still working while receiving Social Security benefits, you are not alone. Many retirees are finding it challenging to make ends meet on an average check of $1,925.46 as of November 2024. This financial strain is prompting many to consider re-entering the workforce, according to the same Motley Fool survey.

While working and claiming benefits, there are income limits to consider. If you claim Social Security before reaching your full retirement age (FRA) — which is 67 for those born in 1960 or later — your benefits can be reduced based on how much you earn.

In good news, the earnings thresholds are increasing in 2025, allowing you to earn more without facing reductions. Here are the updated figures:

• For early filers: In 2025, the earnings limit will rise to $23,400, up from $22,320 in 2024. For every $2 earned above this threshold, SSA will deduct $1 from your benefits. For instance, if you earn $40,000, that’s $16,600 over the limit, resulting in an $8,300 reduction in your Social Security benefits for the year.

• For those reaching FRA in 2025: If you are hitting your FRA, the earnings-limit increases to $62,160, up from $59,520 in 2024. Above this threshold, the SSA will withhold $1 for every $3 earned.

If you have already reached your FRA, you won’t be affected by the earnings test any longer. Any benefits previously withheld will be restored in the form of higher monthly payments.

3. Higher Income Earners Face Increased Social Security Taxes

For those who have not yet retired, it’s essential to be aware of the maximum taxable earnings limit for Social Security, which is slated to increase in 2025. This means a larger portion of your income will go towards Social Security taxes. While this may not be well-received, these taxes are crucial for funding current and future retirees’ benefits.

The taxable earnings cap will go from $168,600 in 2024 to $176,100 in 2025.

Annually, the government sets a limit on earnings that can be taxed for Social Security. Unlike COLAs which are influenced by inflation, this cap relies on the national wage index for its adjustments.

As we begin a new year, it’s prudent to review your financial roadmap in light of these changes. A bit of planning can smooth the path for both retirees and active workers as they navigate 2025.

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