The Social Security program undergoes several changes each year to keep benefits aligned with wages and inflation. It is crucial that retired workers and other beneficiaries understand those changes. Social Security is often a major source of income, so misconceptions and knowledge gaps can lead to serious financial planning mistakes.
Read on to learn about two important changes coming to Social Security next year, and another change that is highly unlikely.
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Social Security benefits will get a cost-of-living adjustment (COLA) in 2025
Social Security payments receive an annual cost-of-living adjustment (COLA) to help retired workers and other recipients keep up with rising prices across the economy. Those COLAs are calculated based on how the Consumer Price Index changes during the third quarter of the previous year, meaning the three-month period from July through September.
In 2025, Social Security benefits will receive a 2.5% cost-of-living adjustment. The chart below details how that change will impact the average payout for different types of Social Security beneficiaries.
|
Beneficiary Type |
Average Benefit (Before COLA) |
Average Benefit (After COLA) |
Additional Income |
|---|---|---|---|
|
Retired workers |
$1,924 |
$1,972 |
$48 |
|
Spouses |
$910 |
$933 |
$23 |
|
Survivors |
$1,509 |
$1,547 |
$38 |
|
Disabled workers |
$1,542 |
$1,581 |
$39 |
Data source: Social Security Administration. Note: Benefit payments have been rounded to the nearest dollar. The average benefit (before COLA) reflects the average payments made to each group in October 2024.
The maximum Social Security benefit for newly retired workers will increase in 2025
Social Security benefits for retired workers are based on lifetime income and claim age, such that payouts get larger as income and claim age increase. The benefits formula is revised annually to ensure payouts reflect the general increase in wages that occurs over time. Consequently, the maximum Social Security benefit tends to increase each year.
The chart below shows the maximum monthly payout for retired workers at different claim ages in 2025.
|
Claim Age |
Maximum Social Security Benefit |
|---|---|
|
62 |
$2,831 |
|
65 |
$3,374 |
|
66 |
$3,795 |
|
67 |
$4,043 |
|
70 |
$5,108 |
Data source: Social Security Administration.
Importantly, very few retired workers will qualify for the maximum Social Security benefit. Doing so requires income above the maximum taxable earnings limit for at least 35 years. That means earning more than $168,600 in 2024, or an equivalent amount (adjusted for inflation) in previous years.
However, retirees can still learn something from the chart above. Delaying Social Security until age 70 (the latest sensible claim age) results in a much larger payout than starting benefits at age 62 (the earliest possible claim age).
The taxation of Social Security benefits will likely continue in 2025 and beyond
The federal government began taxing Social Security benefits in 1984. Congress approved the change as part of a sweeping overhaul meant to keep the trust fund from insolvency. Initially, fewer than 10% of beneficiaries actually owed tax on their Social Security income, but that figure now exceeds 50% because Congress neglected to account for inflation.
To elaborate, Social Security is subject to taxation when combined income exceeds certain thresholds. Combined equals adjusted gross income (AGI) plus nontaxable interest plus one-half of Social Security benefits. The chart below shows what portion of Social Security benefits are taxable at each combined income threshold.
|
Taxable Portion of Benefits |
Single Filers |
Joint Filers |
|---|---|---|
|
0% |
$25,000 or less |
$32,000 or less |
|
50% |
$25,000 to $34,000 |
$32,000 to $44,000 |
|
85% |
$34,000 or more |
$44,000 or more |
Data source: The Social Security Administration.
Importantly, the combined income thresholds shown above have never been adjusted for inflation. So, while Social Security benefits have increased over time to reflection changes in inflation and the average wage, the taxation thresholds have not increased. Consequently, a far larger percentage of retirees now owe tax on their benefits versus when the law took effect four decades ago.
Several politicians have proposed eliminating the tax on Social Security benefits. President-elect Donald Trump during his campaign declared, "Seniors should not pay tax on Social Security." And Rep. Angie Craig (D-Minn.) introduced a bill earlier this year that would exclude benefits from taxable income in 2025.
Unfortunately, those proposals are unlikely to result in any changes next year, or the next few years. Social Security faces a funding shortfall estimated at $22.6 trillion through 2098, and doing away with the tax on benefits would make the problem worse. So, Congress is unlikely to address that particular facet of the program before fixing the financing problem
Importantly, it is possible (maybe even likely) that the tax on Social Security is eliminated in the future. But the next major overhaul is likely a few years away. The Social Security trust fund is on pace to be depleted by 2035, and Congress has historically waited until the last minute to avoid insolvency.
