Social Security is a hot-button issue in politics these days. Without reform, the program may have to cut benefits for millions of seniors who rely on the program to make ends meet and even more Americans who've already paid into the program.
While it's unlikely we will see any major overhauls to Social Security before the end of 2024, the program has some built-in changes that go into effect at the start of every year. And if you're not paying attention, you might end up surprised. Considering the importance of the program for everyone -- retirees and workers alike -- it's important to stay up to date on the latest changes. Here are three big Social Security changes coming in January.
Social Security gets an annual cost-of-living adjustment (COLA), which increases the monthly benefits retirees receive.
The way the Social Security Administration calculates the COLA is based on the growth of a subset of the consumer price index (CPI) in the third quarter of each year. We won't get the final numbers for the COLA until October, when the Bureau of Labor Statistics releases inflation data for September.
That said, inflation has slowed considerably from the high inflation we saw starting in 2021. At this point, the Senior Citizens League forecasts a COLA of 2.6%. That's certainly a slowdown from the last few years, but slow and steady inflation is usually better for the buying power of Social Security benefits compared to hyperinflation. Not to mention, that number is well above the Fed's target for 2% long-term inflation. So, the 2025 raise could leave seniors better off.
Seniors waiting to claim Social Security until they can receive their full benefit may have to wait longer than they realize. That's because we're currently in a period where the full retirement age is increasing every year.
In 1983, Congress passed a law that slowly pushes the full retirement age up to 67. Those born in 1954 reached full retirement age at 66, but the age increases by two months for each year someone is born after 1954 until reaching age 67 for anyone born in 1960 or later. So, in 2025 anyone born in 1958 will reach full retirement age at 66 and 8 months and those born in early 1959 will reach full retirement age at 66 and 10 months.
Full retirement age is an important number because it's instrumental in determining your monthly benefit. Even if you don't wait until your full retirement age to claim benefits or you decide to wait until age 70, your full retirement age determines the size of your penalty (for claiming early) or delayed retirement credit (for claiming later). So, being aware of your full retirement age is important for everyone.
Most people pay into Social Security with a tax of 6.2% on their wages. Employers will match that tax rate, making your total contribution to the program about 12.4% of your paycheck. However, some high earners don't have to pay Social Security taxes on their entire paycheck.
The Social Security Administration caps taxes with a maximum taxable earnings. The amount gets adjusted every year based on the prior year's wage inflation. For 2024, the maximum taxable earnings was $168,600. Any earnings above that level are exempt from Social Security taxes.
The SSA won't have the data it needs until October, but similar to the COLA, workers can expect a more modest increase in the maximum earnings than in previous years due to lower inflation. Still, don't be surprised to see your tax bill climb higher next year if you earn above the 2024 limit.
While most changes will impact seniors who already applied or are planning the best time to apply for Social Security, workers shouldn't ignore the impact of annual changes in Social Security either.