Social Security will see some notable changes in 2025 that could impact millions of Americans. While the average benefit will increase, high earners may face a larger tax bill and retirees could find their cost-of-living adjustment falls short. The Social Security taxable wage base is set to rise from $168,600 in 2024 to $176,100 in 2025.
This means high earners will pay Social Security payroll taxes on an additional $7,500 of income. At the current tax rate of 12.4%, split between employee and employer, this could mean an extra $930 in taxes for those earning above the new limit. Retirees will see a 2.5% cost-of-living adjustment (COLA) in 2025, the smallest increase since 2020.
This will add about $49 to the average monthly benefit. However, many seniors may find this boost insufficient to keep up with rising costs. According to The Senior Citizens League (TSCL), Social Security has lost 20% of its purchasing power since 2010.
Retirees would need an extra $4,442 per year to maintain the same buying power as 15 years ago. The current COLA is calculated using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Some argue this index does not accurately reflect retirees’ expenses.
Social Security adjustments and new leadership
The Consumer Price Index for the Elderly (CPI-E) tracks these costs more closely. If the 2025 COLA had been based on the CPI-E, benefits would have increased by 3%, or about $58 per month on average.
There have been calls for the Social Security Administration to adopt the CPI-E for COLA calculations. However, this change is unlikely in the near term due to concerns it could accelerate the program’s projected insolvency date. Any increase in benefits would need to be balanced with measures to shore up Social Security’s long-term finances.
Despite these challenges, there is some good news. The Social Security application process has been streamlined, with a new online form that has just 12 questions, down from 54 on the previous paper version. This update is currently limited to first-time applicants under 65.
The Social Security Administration will also see new leadership in 2025, with President Trump’s nominee awaiting Senate confirmation to replace the previous commissioner. This change could impact the program’s direction as the administration seeks to trim federal spending. As financial advisors like Dave Ramsey and Suze Orman have cautioned, it’s crucial for Americans to stay informed about Social Security and plan accordingly.
Retirees may need to get creative to stretch their benefits, while workers should consider how these changes fit into their overall retirement strategy. Staying on top of these developments can help ensure a more secure financial future.