The Biggest Social Security Defunding Is Coming in 2025. Are You Ready? | The Motley Fool

Although Social Security has been around for decades, the program’s rules can change. And that makes sense.

Social Security needs to be able to adjust to inflation on a number of issues. And by 2025, many important changes may be coming that could affect retirees and workers alike. Here are some of the notable shifts you should prepare for now.

1. Change in cost of living

Social Security benefits are eligible for generous cost-of-living adjustments (COLAs). The purpose of COLAs is to help recipients maintain their purchasing power as inflation increases the cost of living.

Beginning in 2024, Social Security benefits increased by 3.2%. Next year’s COLA, however, may not be as generous. Early estimates put that number at 2.63%, but that could change depending on how inflation changes in the third quarter of the year.

Seniors on Social Security should prepare for a smaller COLA in 2025. That could mean changing your income to try to reduce costs, or participating in the gig economy for extra income.

2. Upper limit of income assessment

Seniors on Social Security are allowed to earn income from work. But for those who have not yet reached full retirement age, there are income limits to keep in mind. Going over the annual earnings review limit means having some of those Social Security benefits denied (although you can be sure that the denied benefits will be paid to you right away when you reach full retirement age).

In 2024, the salary assessment limit is $22,320. However, if you will have reached full retirement age at the end of the year and have not, the limit is $59,520.

In 2025, the earnings test limit may increase, giving you the opportunity to earn more money without affecting your Social Security benefits. So if you’ve been meaning to add gig work or increase your hours at a part-time job, it might pay to wait until January to do so.

3. A bigger salary cap

Social Security’s main source of funding is income tax revenue. But it’s not a given that workers will pay Social Security taxes on all of their earnings.

Each year, wages are set to determine how much wages are subject to Social Security taxes. Currently, that cap sits at $168,600. But by 2025, it may go up.

So if you don’t expect your salary to be above $168,600 in 2025, you have nothing to worry about. But if you are a high earner, then it may be time to sit down with a tax professional and work on strategies to lower your overall tax burden. And if you’re stuck on that, budget carefully to account for the fact that you might lose a lot of your Social Security tax next year.

4. High income earning employment

To collect Social Security when you retire, you generally have to earn a certain amount and pay taxes on that amount throughout your career. Of course, there are options for collecting Social Security without working, such as filing for spousal benefits. But if that’s not an option, you’ll want to make sure you’re earning enough to receive benefits when you’re older.

For that to happen, you need to accumulate 40 career points in your lifetime. And you can only get up to four per year.

The value of the work credit is currently $1,730. But by 2025, you’ll need to earn more than that for a single loan. So if you’re a part-time worker trying to qualify for Social Security, be aware of what the income per credit requirement is. You may need to increase your hours to make sure you get the four credits you’re after next year.

Changes to Social Security in the new year won’t just affect retirees. They have the potential to affect many workers as well. Because of this, it is important to pay attention to what is happening with Social Security so that you can adapt.