Over a decades-long retirement, inflation can erode the value of your guaranteed sources of income – like Social Security. Fortunately, the federal government took this fact into account and implemented annual adjustments to Social Security benefits in 1975. These increases are called Cost-of-Living Adjustments but are better known as COLAs.
The Social Security Administration has increased benefits most years since COLAs were implemented to account for inflation. This year is no different and beneficiaries will enjoy higher monthly income starting in the new year.
The 2025 Social Security COLA
The 2025 COLA will increase Social Security benefits by 2.5% for all people collecting Social Security benefits – including retirees and those who qualify for Supplemental Security Income [SSI]. The latest COLA is lower than last year’s 3.2% increase due to lower inflation.
With the latest increase, the average monthly benefit will rise from $1,927 to $1,976. The cap on Social Security benefits for high earners will also rise – bringing the maximum monthly benefit for a worker retiring at Full Retirement Age [FRA] from $3,822 to $4,018.
When will you see increased benefits?
If you are currently receiving Social Security retirement benefits, your monthly income will rise in January 2025 to reflect the COLA. Those receiving SSI benefits will see the increase slightly earlier, starting on December 31, 2024.
To see how much your benefits will increase, log on to your My Social Security account in December for your personalized benefits statement. You will also receive a letter from the SSA by mail detailing your benefits for the upcoming year.
Delaying benefits past your FRA? Don’t worry, you will still get the benefit of the COLA. The annual increase takes effect each year you are eligible for Social Security, even if you aren’t receiving benefits. For this reason, you’ll see the cumulative effect of all COLAs when you begin receiving benefits.
How are COLAs calculated?
Since Congress enacted automatic adjustments in 1975, annual COLAs have been determined by the change in the Consumer Price Index for Urban Wage Earners and Clerical Workers [CPI-W]. This index is maintained by the Bureau of Labor Statistics and measures the change in prices of a hypothetical basket of goods and services. These costs are weighted based on the spending patterns of workers living in urban areas.
While similarly named, the CPI-W is slightly different than the Consumer Price Index for All Urban Consumers [CPI-U], which is often quoted by media outlets. For this reason, the COLA increase may not perfectly match the inflation readings you’ve seen in media publications.
The COLA is calculated by measuring the change in the CPI-W from the third quarter of the previous year through the third quarter of the current year. This year, the change is measured from Q3 2023 through Q3 2024.
Other Important Social Security Information For 2025
In addition to the COLA, the SSA announced inflation adjustments for other Social Security programs. These included changes to the thresholds for the earnings test and the amount of Social Security tax owed on earned income.
Higher Thresholds for The Earnings Test
The earnings test applies to working beneficiaries receiving Social Security prior to their FRA. It causes a portion of your benefits to be withheld for every dollar you earn over the threshold. Once you reach your FRA, the withheld benefits are paid back to you over the course of your life.
The new earnings test limits are:
- $1 will be withheld for every $2 you earn over $23,400 if you will not reach FRA in 2025.
- $1 will be withheld for every $3 you earn over $62,160 if you will reach FRA in 2025.
Social Security Maximum Taxable Earnings Increased
The Social Security and Medicare tax rates will remain at 7.65% for employees and 15.30% for self-employed individuals in 2025. However, the amount of income subject to Social Security tax will increase from $168,600 to $176,100. This change could cause high earners to pay slightly more in income tax next year.
The annual COLA is a welcome addition to monthly income for most retirees and can help cover the rising costs of necessities like food, shelter, and energy. To discuss other ways to maximize your Social Security benefits and improve your retirement income, contact an experienced financial advisor.
Meld Financial: Your Social Security Resource
At Meld Financial, our team of tax, legal, and investment professionals has spent more than four decades helping clients achieve retirement success. We’ve aided hundreds of individuals and couples in getting the most from Social Security and Medicare.
Our team can help you determine when to begin benefits, how to coordinate with a spouse, and how government benefits fit into your overall retirement plan. All of this is possible through our comprehensive wealth management program – Financial Fingerprint®. It was designed over decades of managing client wealth to bring together the most important aspects of your financial life into a single easy to understand plan.
To learn more about Financial Fingerprint® and get started today, contact a member of our team.
