The new year brings important updates to Social Security that may impact both current and future beneficiaries. These changes, which take effect in January 2025, include an increase in benefits, adjustments to the retirement age, and new rules for early retirement penalties. Here’s everything you need to know about these changes.
Cost-of-Living Adjustment (COLA) for 2025
This Article Includes
Each year, the Social Security Administration (SSA) announces a cost-of-living adjustment (COLA) to keep benefits in line with inflation. For 2025, the COLA will increase by 2.5%, meaning beneficiaries will see their monthly payments rise accordingly. This adjustment is made to help Social Security recipients maintain their purchasing power in light of inflation and rising living costs.
Along with the COLA, the amount required to earn a Social Security credit, or “quarter of coverage,” will also increase. Additionally, the wage cap for Social Security taxes will rise, meaning higher earners will contribute more to the program.
Changes to Full Retirement Age
One of the most significant changes coming in 2025 is the increase in full retirement age (FRA). Traditionally, the full retirement age for Social Security has been 66 years and 8 months, but for those born in 1959, the FRA will increase to 66 years and 10 months. This means that only those born in the first two months of 1959 will be able to claim full Social Security benefits in 2025 without any reduction.
For people born in 1960 or later, full retirement age will rise to 67, meaning they will need to wait longer to begin claiming full benefits. It’s important to note that the SSA considers January 1st birthdays as falling under the previous year’s rules, so people born on January 1, 1960, for example, will reach full retirement age at 67, even though the rule technically applies to those born in 1960.
#DYK you can work and receive your full retirement benefits? If you are full retirement age, you can earn as much as you like without having your benefit amount reduced. Stay informed by checking your full retirement age today, https://t.co/PYjyAKXR4X. pic.twitter.com/j8E88HiizH
— Social Security (@SocialSecurity) December 4, 2024
Early Retirement: Reduced Benefits
While Social Security allows individuals to start receiving retirement benefits at the age of 62, doing so comes with a significant penalty. Beneficiaries who begin collecting their benefits early will see a reduction in their monthly payment, which is permanent.
The SSA calculates the reduction based on the number of months before the individual reaches their full retirement age. For the first 36 months before FRA, the reduction is 5/9 of 1% per month, or about 0.55%. For each additional month beyond 36 months, the reduction is 5/12 of 1%, or approximately 0.42%.
For instance, someone born in 1960, who is eligible to claim benefits at 62, would be 60 months short of their full retirement age of 67. This translates to a 30% permanent reduction in their monthly benefits. Therefore, while early retirement may seem appealing, it can significantly lower long-term benefits.
What to Consider Before Retiring Early
It’s important to consider the financial impact of early retirement before making a decision. While retiring early may seem like a way to start enjoying Social Security benefits sooner, the reduced payments can add up over time, especially for those who live longer lives. For those thinking about retiring early, the SSA recommends visiting their website for more detailed information on how early retirement will affect your benefits.
Additionally, people who are nearing retirement should be aware of these changes well in advance to plan accordingly. While it may not be possible to reverse the decision once benefits are started, knowing how these adjustments will affect your future income can help you make more informed decisions.
Conclusion
The Social Security changes taking effect in January 2025 will have a significant impact on beneficiaries. The 2.5% COLA increase provides much-needed relief to recipients, but the changes to full retirement age and early retirement penalties require careful consideration. By understanding how these changes will affect you, you can make more informed decisions about when to claim Social Security benefits and how to plan for a secure retirement.
Before making any decisions, it’s always advisable to visit the SSA’s website or consult with a financial advisor to ensure you’re taking the right steps for your unique situation.