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Here's the 1 Social Security Change in 2025 That's Going to Hurt the Worst

The Motley FoolDec 14, 2024 9:45 AM
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New years always usher in changes. 2025 will be no different. Some of those changes shouldn't be surprises. For example, the Social Security Administration (SSA) has already revealed changes to Social Security that are coming next year.

Some of those changes are good ones. Others are not so good. Here's the one Social Security change in 2025 that's going to hurt the worst.

A senior couple looking at documents in a home environment.

Image source: Getty Images.

Social Security changes that could be painful to some

For many people, paying taxes is a necessary evil. The new year will bring greater evil for some. In 2025, FICA taxes will increase for higher earners as a result of one key Social Security change.

To be clear, the FICA tax rate isn't changing. It will still be 15.3%, split equally between employees and employers. Of that amount, 12.4% (6.2% each for employees and employers) goes toward funding Social Security.

However, the amount of income subject to the Social Security portion of the FICA tax will change next year. The maximum taxable earnings is currently $168,600 but will rise to $176,100 in 2025. There is no limit on the amount of earnings for which FICA taxes used to fund Medicare must be paid.

Some Americans who begin receiving Social Security retirement benefits before their full retirement age (FRA) but continue working could also be negatively impacted by a change in 2025. Currently, Social Security will withhold $1 in benefits for every $2 in earnings above $22,320 for those under their FRA. This limit will increase to $23,400 in the new year. Social Security also currently withholds $1 in benefits for every $3 in earnings above $59,520 during the year an individual reaches their FRA. This threshold will increase to $62,160 in 2025.

The COLA catch

Ironically, the most painful Social Security change in 2025 will be one that's intended to help people. All Social Security beneficiaries will receive a cost-of-living adjustment (COLA) of 2.5% beginning in January. The purpose of the COLA is to protect Social Security benefits from being eroded by inflation. But for many (and perhaps even most) individuals, the 2.5% increase won't achieve that goal.

The 2025 COLA will be the lowest increase given since 2020. In one sense, that's good news. A lower COLA means lower inflation since the adjustment is based on an inflation metric -- the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

However, there's a well-known flaw with the CPI-W: It doesn't accurately reflect the increased costs incurred by seniors. Retirees could especially feel the sting of the low COLA next year. In particular, medical costs tend to rise at a faster rate than overall inflation. We saw this in the latest inflation report for November, with the costs of medical care services jumping 3.8% year over year while the CPI-W rose 2.4%.

Retirees already know they'll be hit in 2025 with one healthcare-related expense that will increase by more than 2.5%. The standard Medicare Part B premium next year will be $185, up 5.8% from the standard premium this year. This higher premium by itself will wipe out roughly 20% of the average Social Security COLA.

How to minimize the pain

Is there anything you can do to minimize the pain from a COLA that doesn't fully offset inflation? Yes, but some of the options won't be appealing or even applicable to every person.

One strategy is to rigorously track expenses and try to reduce expenses wherever possible. Unfortunately, many Social Security beneficiaries are already spending as little as possible. Some receiving Social Security retirement benefits could seek additional income. Perhaps you could take on a part-time job or do some freelancing.

Probably the best thing you can do, though, is to take care of your health as much as possible. Preventing medical expenses will keep more money in your pocket -- and help you enjoy what you keep more.

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Disclaimer: The information provided on this website is for educational and informational purposes only and should not be considered financial or investment advice.

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