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As we move into 2025, millions of Americans will experience changes to their Social Security benefits. The Social Security Administration (SSA) has announced a 2.5% Cost-of-Living Adjustment (COLA) for Social Security and Supplemental Security Income (SSI) payments. This increase is designed to help beneficiaries maintain their purchasing power by keeping up with inflation. In this article, we’ll explore the details of this adjustment, its effects on various aspects of Social Security, and the implications for related taxes and benefits.
The 2025 Cost-of-Living Adjustment (COLA)
The COLA is an annual adjustment to Social Security benefits aimed at offsetting the impact of inflation. The adjustment is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which measures changes in the cost of living. For 2025, the COLA is set at 2.5%, slightly lower than the average 2.6% increase over the past decade. This adjustment will provide an average increase of about $50 per month for Social Security retirement beneficiaries, starting in January.
Each year, the SSA releases a Fact Sheet that outlines the key figures impacted by the annual COLA.
The History of Automatic COLA Adjustments
The COLA system ensures that Social Security and SSI benefits keep pace with inflation. The COLA is calculated based on the percentage increase in the CPI-W from the third quarter of the last year a COLA was issued to the third quarter of the current year. If there is no increase in the CPI-W, no COLA is applied.
The Bureau of Labor Statistics within the Department of Labor determines the CPI-W, which the SSA uses to calculate COLAs as required by law. Congress introduced the automatic COLA provision in the 1972 Social Security Amendments, with automatic COLAs starting in 1975. Prior to this, benefits only increased when Congress passed special legislation.
Below is a look at recent COLA adjustments:
January 2016 – 0.0%
January 2017 – 0.3%
January 2018 – 2.0%
January 2019 – 2.8%
January 2020 – 1.6%
January 2021 – 1.3%
January 2022 – 5.9%
January 2023 – 8.7%
January 2024 – 3.2%
January 2025 – 2.5%
Impact on Social Security and SSI Recipients
Nearly 68 million Social Security recipients will see the 2.5% increase reflected in their payments. Additionally, around 7.5 million SSI recipients will receive their increased payments starting on December 31, 2024.
Changes in FICA and Self-Employment Tax
While the tax rates for the Federal Insurance Contributions Act (FICA) remain unchanged for 2025, the taxable maximum — the highest amount of earnings subject to Social Security taxes — will increase. Employees will continue to pay a combined 7.65% rate (6.2% for Social Security and 1.45% for Medicare), while self-employed individuals will pay 15.3%. However, the taxable maximum will rise from $168,600 in 2024 to $176,100 in 2025, meaning higher earners will contribute more to Social Security.
Quarter of Coverage
The "quarter of coverage," or Social Security credit, determines eligibility for Social Security benefits. In 2025, the earnings required to earn one credit will rise from $1,730 to $1,810. Workers can earn up to four credits per year, which are crucial for qualifying for retirement, disability, and survivor benefits.
Retirement Earnings Test Exemptions
For individuals below full retirement age, the retirement earnings test limits how much they can earn before their Social Security benefits are reduced. In 2025, the exempt amount will increase to $23,400 annually ($1,950 per month), up from $22,320 annually ($1,860 per month) in 2024. For every $2 earned above this threshold, $1 in benefits will be withheld.
Maximum Social Security Benefit at Full Retirement Age
The maximum Social Security benefit for those reaching full retirement age will increase in 2025, with the exact amount depending on the individual's earnings history. Generally, the combination of the COLA and the increase in the taxable maximum means higher maximum benefits for retirees. The maximum benefit in 2025 will be $5,180 per month, up from $4,960 per month in 2024.
These adjustments ensure that Social Security remains a vital source of income for millions of Americans, despite the ever-changing cost of living. Whether you’re already receiving benefits or planning for retirement, staying informed about these updates is key to making the most of your Social Security benefits. If you have any questions, feel free to contact our office.
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