Title: The One Social Security Adjustment in 2025 That Germanes Most Negatively to Many
2025 is preparing to bring about a slew of changes, and Social Security is no exception. Some shifts might not come as a surprise, and understandably so, considering the Social Security Administration has already spilled the beans on upcoming developments.
There's both good news and bad news in store for us. Let's focus on the negative aspect that's likely to impact a substantial number of Americans.
Changes that may hurt some
For people who have long considered paying taxes an unwelcome burden, the new year is set to introduce even more hardships. 2025 will see harsher realities for some, especially when it comes to FICA taxes.
FICA taxes and its upgrades
Although the FICA tax rate remains unchanged, it's the maximum taxable earnings that will undergo a shift. Currently, the limit stands at $168,600, but by 2025, it's anticipated to ascend to $176,100. This means higher earners will have to shell out more in Social Security taxes. The FICA tax rate, at 15.3%, remains the same, with each party contributing 7.65%.
Older retirees face challenges too
Individuals who begin receiving Social Security retirement benefits before their full retirement age (FRA) but continue working might encounter problems in 2025. Social Security will deduct $1 from benefits for every $2 earned in excess of $22,320 for individuals below their FRA. This limit will surge to $23,400 in the new year. Social Security also withholds $1 in benefits for every $3 earned above $59,520 during the year an individual reaches their FRA. In 2025, this threshold will escalate to $62,160.
The sneaky cost-of-living adjustment (COLA) conundrum
Unbelievably, the most fortune-turning Social Security change in 2025 is a measure designed to safeguard recipients. All Social Security beneficiaries will receive a cost-of-living adjustment (COLA) of 2.5%, starting from January 2025. The COLA aims to protect Social Security benefits from inflation erosion. However, this increase falls short for many beneficiaries, making their daily expenses just as difficult to manage.
The 2025 COLA is the lowest increase given since 2020. This can be seen as a blessing in disguise - a lower COLA means lower inflation, given that the adjustment is tied to an inflation metric – the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
However, the unfavorable side to this low COLA becomes apparent when one considers that retirees are particularly vulnerable to healthcare-related expenses' rapid price inflation. In fact, medical expenses tend to grow at a rate higher than overall inflation. This was evident in the latest inflation report, with medical care services showing a 3.8% year-over-year increase while CPI-W rose by 2.4%.
Retirees are already well-versed in the reality of an upcoming healthcare-linked expense increase that surpasses the 2.5% COLA. The standard Medicare Part B premium will climbing to $185 in 2025, representing a 5.8% surge from the current standard premium. Nationwide, this premium increase is roughly equivalent to wiping out about 20% of the average Social Security's COLA earnings.
How to mitigate the sting
Is there a conceivable course of action to alleviate the blow of a COLA that isn't sufficient to compensate for inflation? In a word, yes, but take note that not all of these solutions will be suitable or even viable for every citizen.
One approach is to meticulously evaluate and minimize discretionary spending. Sadly, many Social Security beneficiaries are already endeavoring to cut their expenses as far as possible.
For people who can, an additional income source is always an option. This might entail securing a part-time job or engaging in freelance work.
Ultimately, though, the best bet is to maintain good health as much as possible. Preventing medical expenditures will help you preserve more income while allowing you to enjoy your savings more extensively.
In light of the upcoming changes, individuals approaching retirement may need to reevaluate their financial plans. The anticipated increase in FICA taxes for higher earners and the higher income threshold for benefit deductions could impact their retirement savings. Additionally, the 2.5% cost-of-living adjustment (COLA) for 2025 might not fully offset the rising healthcare costs, which often increase at a rate higher than overall inflation. As a result, retirees must consider careful budgeting, potential additional sources of income, and maintaining good health to mitigate the effects of these changes.
