Personal Finance

Social Security 2025: There's a Big Change Coming You May Not Have Known About

Maurie Backman

Published: November 7, 2024 9:06 am

Key Insights from 24/7 Wall St.

• You’ve probably heard that Social Security benefits are rising by 2.5% in the new year.
• Social Security is also increasing its taxable wage cap.
• Higher earners will pay more into the program in 2025, and the self-employed will be impacted the most.
• Also: Take this quiz to see if you’re on track to retire (Sponsored)

In October, the Social Security Administration (SSA) announced an official cost-of-living adjustment (COLA) for 2025, and the number is far from generous. Monthly benefits will only be rising by 2.5% in the new year, representing the smallest COLA to arrive since 2022.

Based on the average monthly benefit today, a 2.5% COLA will result in an extra $49 per month once that raise takes effect in January. And that doesn’t account for an uptick in the cost of Medicare Part B that will affect seniors enrolled in both programs.

But a 2.5% COLA wasn’t the only Social Security news to come out in October. The SSA rolled out a number of key changes to the program for 2025, and there’s one in particular that higher earners aren’t going to like one bit.

Social Security’s Wage Cap Is Increasing

Social Security relies on payroll tax revenue to stay afloat. It’s for this reason that benefit cuts may be on the horizon.

In the coming years, a substantial number of baby boomers are expected to retire, and the number of workers coming in to replace them could result in a smaller labor force on a whole. That, in turn, will shrink Social Security’s primary source of revenue, putting the program at risk of benefit cuts once its trust funds run dry.

Meanwhile, Social Security sets a wage cap for tax purposes every year. In 2024, workers had to pay into the program on their first $168,600 of income. In 2025, the wage cap is rising to $176,100.

This means that higher earners face Social Security taxes on an additional $7,500 of earnings. At a rate of 12.4%, that’s an extra $930 in taxes.

The good news is that Social Security taxes are split evenly with employers among salaried workers. So for many people on the hook for that extra tax, their portion of that burden is only $465. The self-employed, however, don’t have another party to share in that added burden, so people in that boat should gear up to lose another $930 in taxes in 2025.

Will Social Security’s Wage Cap Get Eliminated?

Higher earners may not be jumping for joy over an increased Social Security wage cap in 2025. But given that some lawmakers have suggested eliminating the cap altogether and taxing all wages to fund Social Security, increasing the cap by $7,500 doesn’t seem so terrible.

It’s also worth noting that this change will only impact a relatively small subset of U.S. workers on a whole. YouGov reports that 18% of working Americans earn more than $100,000 per year, which means the majority of people may not even realize that this Social Security change is taking place.