With 2024 more than half over, it's time for current and future retirees to start preparing for some Social Security changes that are coming in 2025. They could affect when you can claim benefits as well as how much your benefits are going to be.
Unfortunately, neither is good for seniors, which means it's critical to start preparing now so you won't get surprised by a big financial hit. Here's what the big changes are, along with some details about how they'll affect you.
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1. Full retirement age is moving later
The biggest change that could affect Social Security next year is that full retirement age is moving later. This change affects people who haven't yet claimed benefits but are going to do so very soon.
To understand why this change is important, it's necessary to know what full retirement age is. FRA is when you'll need to claim your first Social Security check if you want to receive exactly your standard benefit rather than a benefit reduced by penalties for filing early or a benefit increased by delayed retirement credits if you wait beyond FRA to claim it.
Full retirement age is changing in 2025. For those who turned 66 in 2024, FRA is 66 and eight months. But if you won't be turning 66 until next year, your FRA will instead be 66 and 10 months. For those who won't turn 66 until 2026 or beyond, FRA will be even later, at 67 years old. This change to full retirement age has tremendous importance for any retiree deciding when to claim benefits.
See, if you claim benefits even a single month before FRA, you'll be hit with early-fling penalties. You must wait until exactly 66 and 10 months if you turn 66 next year and don't want these penalties to reduce monthly benefits for the rest of your life. The reduction is 5/9 of 1% for each of the first 36 months you get a benefit check before your FRA and 5/12 of 1% for any month before that.
A change to FRA that pushes it later means you have two choices, and neither is great. You can work an extra couple of months to avoid early fling penalties, or you can claim ahead of schedule and accept a lifetime benefits reduction. You need to make an informed choice on this, which is why it's so important to understand how FRA is changing.
If you're getting ready to claim Social Security next year, plan for this change now, as it may affect exactly when you retire. If you need to work an extra few months compared to your peers who turned 66 sooner, start preparing for that reality now -- rather than counting down the days until you're done with your job only to find out too late that you didn't adjust based on the 2025 changes to the full retirement age.
2. The Social Security cost of living adjustment is likely to be smaller than in 2024
Retirees already receiving Social Security benefits have another change to adjust to as well. They are very likely to receive a smaller Cost of Living Adjustment (COLA) in 2025 compared with the raises they've received post-pandemic.
COLAs are based on inflation, and since preliminary data suggests much lower rates of inflation this year than over the past several years, seniors are virtually certain to get a lower benefits increase than they're probably expecting. Retirees got a 3.2% benefits increase this year, an 8.7% increase in 2023 and a 5.9% bump in their 2022 checks. Now, experts are predicting that the COLA is going to be just 2.7% in 2025.
Unfortunately, COLAs have long been unable to keep pace with the actual inflation most retirees experience because they measure changes in costs over time using a price index that tracks the spending habits of urban wage earners and clerical workers. Seniors don't buy the same basket of goods and services as this group, so their raises have been too small, and benefits have lost 36% of buying power since 2000.
Seniors must be aware to the important change in their COLA in 2025 so they can start planning for a smaller benefits bump and even less buying power in the coming year. It may be time to look at budget cuts or other alternatives now before the new year comes and you don't get the money you need and expect.
By preparing for these two changes, you can put yourself in the best financial position possible, even if that means putting off Social Security or coping with the fact that your benefits increase could leave you falling further behind.
