Social Security will take a drastic turn in 2025 – 3 important things that will change forever

More than 51 million retired Americans relied on Social Security payments in August 2024, making it an essential part of retirement income for many. According to Gallup, nearly 90% of retired workers consider Social Security crucial to their financial security, yet gaps in understanding about the program can lead to costly mistakes. Staying updated on Social Security changes is especially important, given its role in supporting retirees’ purchasing power.

Cost-of-Living Adjustment (COLA) for Social Security Benefits

To help maintain purchasing power against inflation, Social Security benefits undergo an annual cost-of-living adjustment (COLA). This adjustment is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). In 2025, the COLA will be especially relevant, as inflation remains a top concern for Americans. The Bureau of Labor Statistics calculates the COLA by measuring changes in the CPI-W during the third quarter of 2024 (July through September). This data will be released on October 10, 2024, at 8:30 AM ET, with the Social Security Administration (SSA) publishing the official COLA for 2025 soon after.

Social Security recipients will also receive a notice in December about their new payment amounts, which will be accessible through their my Social Security accounts. The Senior Citizens League anticipates a 2.5% COLA increase for 2025, allowing beneficiaries to estimate their new benefit amounts by applying this percentage.

Understanding the Impact of COLA

COLAs are designed to help Social Security benefits keep pace with inflation, but they may not fully counter rising costs in specific categories like housing, healthcare, and utilities, which often increase faster than general inflation. Retirees should remain mindful of their budgets and consider how other sources of income might help cover these rising expenses.

Increase in Full Retirement Age (FRA)

In 2025, the full retirement age (FRA)—the age at which retirees are eligible for 100% of their primary insurance amount (PIA)—will increase again. The FRA depends on a retiree’s birth year and has been gradually rising over time. In 2024, people born in the latter half of 1957 and the early part of 1958 reached their FRA at 66 years and 6 months and 66 years and 8 months, respectively.

In 2025, those born from May to December of 1958 will reach FRA at 66 years and 8 months, and those born in early 1959 will reach FRA at 66 years and 10 months. The FRA increases have significant implications for retirees:

• Claiming Early: Retirees can begin receiving Social Security at age 62, but claiming before FRA reduces monthly benefits. For example, claiming at age 62 could reduce benefits by as much as 30%.
• Delayed Retirement Credits: If retirees delay claiming until after FRA, they can earn delayed retirement credits, increasing monthly benefits by about 8% annually until age 70.

Careful planning around when to start Social Security benefits can help retirees maximize their income over the course of their retirement.

Withholding of Benefits for Retired Workers Under FRA

For retirees who begin claiming benefits before reaching FRA, certain income restrictions apply under the Retirement Earnings Test (RET). This test involves two annual exempt income limits, which determine how much Social Security is withheld based on a beneficiary’s earnings:

• Lower Limit: Retirees under FRA for the entire year will have $1 withheld for every $2 earned above this threshold.
• Higher Limit: For those who reach FRA within the year, $1 is withheld for every $3 earned above this limit.

The projected exempt limits for 2025 include an increase to $23,280 for the lower limit and $61,800 for the higher limit. Importantly, the RET no longer applies once a retiree reaches FRA, meaning they can earn unlimited income without benefit reductions. Withheld benefits are eventually recouped in monthly payments after reaching FRA, enabling retirees to recover these amounts over time.

Maximizing Social Security Benefits in Retirement

Understanding how COLA, FRA, and RET impact Social Security benefits can make a significant difference in retirement income. To maximize benefits:

1. Monitor Annual COLA Announcements: Staying informed about COLA increases helps retirees anticipate their monthly income and adjust their budgets accordingly.
2. Consider Timing for Claiming Benefits: Claiming early reduces monthly benefits, while delaying boosts them. Calculating the potential lifetime benefits under different claiming strategies can help optimize retirement income.
3. Understand Income Limits Under RET: For retirees working before FRA, awareness of income thresholds can prevent unexpected benefit reductions.

By understanding these key Social Security adjustments and timelines, retirees can better plan to sustain their financial well-being throughout retirement.