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.
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.
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%.
