Article Highlights:
- The 2025 Cost-of-Living Adjustment (COLA)
- History of Automatic Cost-Of-Living Adjustments
- Impact on Social Security and SSI Beneficiaries
- Changes in FICA and Self-Employment Tax
- Quarter of Coverage
- Retirement Earnings Test Exempt Amounts
- Maximum Social Security Benefit at Full Retirement
As we step into 2025, millions of Americans are set to experience a notable change in their Social Security benefits. The Social Security Administration (SSA) has announced a 2.5 percent cost-of-living adjustment (COLA) for Social Security benefits and Supplemental Security Income (SSI) payments. This adjustment is crucial for beneficiaries, as it helps them keep pace with inflation and maintain their purchasing power. In this blog, we will delve into the details of this increase, its implications on various aspects of Social Security, and how it affects related taxes and benefits.
The 2025 Cost-of-Living Adjustment (COLA) – The COLA is an annual adjustment made to Social Security benefits to counteract the effects of inflation. It 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 percent, slightly below the average increase of 2.6 percent over the past decade. This adjustment will result in an average increase of about $50 per month for Social Security retirement beneficiaries starting in January.
Each year the Social Security Administration publishes a Fact Sheet that includes the many values affected by the annual cost of living adjustment.
History of Automatic Cost-Of-Living Adjustments – The purpose of the COLA is to ensure that the purchasing power of Social Security and Supplemental Security Income (SSI) benefits is not eroded by inflation. It is based on the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the third quarter of the last year a COLA was determined to the third quarter of the current year. If there is no increase, there can be no COLA.
The CPI-W is determined by the Bureau of Labor Statistics in the Department of Labor. By law, it is the official measure used by the Social Security Administration to calculate COLAs.
Congress enacted the COLA provision as part of the 1972 Social Security Amendments, and automatic annual COLAs began in 1975. Before that, benefits were increased only when Congress enacted special legislation.
Beginning in 1975, Social Security started automatic annual cost-of-living allowances. The change was enacted by legislation that ties COLAs to the annual increase in the Consumer Price Index (CPI-W).
For comparison, the following are COLA adjustments for recent years:
- 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 Beneficiaries – Nearly 68 million Social Security beneficiaries will see this increase reflected in their payments. Additionally, approximately 7.5 million SSI recipients will begin receiving increased payments on December 31, 2024.
Changes in FICA and Self-Employment Tax – The Federal Insurance Contributions Act (FICA) tax, which funds Social Security and Medicare, remains unchanged in terms of rates for 2025. Employees will continue to pay a combined rate of 7.65 percent, which includes 6.20 percent for Social Security (OASDI) and 1.45 percent for Medicare (HI). Self-employed individuals will pay a total of 15.30 percent, reflecting both the employee and employer portions.
However, the maximum amount of earnings subject to the Social Security tax, known as the taxable maximum, will increase from $168,600 in 2024 to $176,100 in 2025. This means that higher earners will contribute more to Social Security, reflecting the increase in average wages.
Quarter of Coverage – The quarter of coverage, also known as a Social Security credit, is a measure used to determine eligibility for Social Security benefits. In 2025, the amount of earnings required to earn one credit will increase from $1,730 to $1,810. Workers can earn up to four credits per year, and these credits are essential for qualifying for retirement, disability, and survivor benefits.
Retirement Earnings Test Exempt Amounts – For individuals who have not yet reached full retirement age, the retirement earnings test determines how much they can earn before their Social Security benefits are reduced. In 2025, the exempt amount will increase to $23,400 annually, or $1,950 monthly, up from $22,320 annually, or $1,860 monthly, in 2024. For every $2 earned above this limit, $1 in benefits will be withheld.
Maximum Social Security Benefit at Full Retirement – The maximum Social Security benefit for those retiring at full retirement age will also see an adjustment. While the exact amount can vary based on individual earnings history, the increase in the taxable maximum and the COLA will generally lead to higher maximum benefits for new retirees in 2025. This adjustment ensures that benefits remain aligned with inflation and wage growth. For 2025 the maximum is $5,180 per month up from $4,960 per month in 2024.
As the cost of living continues to evolve, these adjustments play a crucial role in ensuring that Social Security remains a reliable source of income for millions of Americans. Whether you are a current beneficiary or planning for retirement, staying informed about these changes is essential for making the most of your Social Security benefits. Please contact this office with any questions.