Prepare Yourself for Two Potentially Painful Social Security Changes in 2025
2025 brings significant alterations to Social Security, with some changes offering positivity, while others might be harder to swallow for some workers and retirees. On the upside, around 2.8 million Americans will receive enhanced benefits due to the approval of the Social Security Fairness Act.
Regrettably, not every expected change in 2025 is something to revel in. Here are two developments that might pose difficulties for some:
1. Enhanced Social Security payroll tax for high earners
The Social Security taxable wage base surged from $168,600 in 2024 to $176,100 in 2025. This refers to the portion of your annual income subject to Social Security payroll taxes if employed. Currently, the tax rate stands at 12.4%, with employees contributing half and employers covering the other half.
The majority of workers likely won't experience any changes because few people earn more than $176,100 annually. Therefore, this tax is familiar territory for them since they've always paid it on all of their earnings. However, high earners should anticipate facing a shift.
A 12.4% tax on an additional $7,500 could add another $930 to their 2025 taxes. Individuals with moderate to substantial income will incur increased taxes as the taxable wage base escalates in the future. This could become more painful if the government opts to significantly increase or scrap the taxable wage base altogether to tackle Social Security's funding deficit. Although this remains a proposal, not a guaranteed outcome.
2. Insufficient cost-of-living adjustment (COLA) for retirees
In 2025, Social Security's cost-of-living adjustment (COLA) has been set at 2.5%. This is the smallest increase since 2020 and amounts to approximately $49 more in the typical retiree's monthly check. While it's better than nothing, many senior citizens who depend heavily on their benefits acknowledge that it's not enough.
Despite annual COLAs, the purchasing power of Social Security has dwindled by 20% since 2010, according to The Senior Citizens League (TSCL). The average retiree would need an extra $4,442 annually for their checks to replicate their buying power from 15 years earlier.
The main problem stems from the method used to calculate COLAs. At present, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) determines the inflation rate between one year and the next. However, this index only assesses wage earners, neglecting retirees, whom a separate Consumer Price Index for the Elderly (CPI-E) tracks.
If the Social Security Administration had utilized the CPI-E to determine the 2025 COLA, seniors would have received a 3% increase instead of 2.5%, increasing their monthly checks by around $58.
Despite advocacy from some within the government to transition to the CPI-E, the proposal has faced resistance. One of the primary reasons being Social Security's looming insolvency. Any changes that could boost payable benefits, such as larger COLAs, would also hasten the insolvency date. Consequently, it's unlikely that this change will materialize until the government addresses the deficit.
Meanwhile, it's essential for seniors to find creative ways to stretch their finances. Choosing when to apply for benefits strategically, if you haven't yet, can be helpful. Diversifying your retirement income sources can also contribute significantly to your financial security.
In light of these changes, high-earning retirees may need to adjust their retirement finance plans due to the increased Social Security payroll tax. The taxable wage base for 2025 has risen, leading to additional taxes for those earning above $176,100. On the other hand, retirement income might not keep pace with inflation for many retirees, as the proposed cost-of-living adjustment (COLA) of 2.5% might not be sufficient to maintain their purchasing power.