High-Income Employees Prepare for Mixed Updates Regarding Social Security in 2025
The Social Security Administration recently disclosed the cost-of-living adjustment (COLA) for 2025, and beneficiaries can anticipate a 2.5% increase (approximately $50 per month for the typical retiree) in the upcoming year.
However, this isn't the only modification coming for Social Security. With the new year comes various income restrictions that may impact your benefit in various ways.
Many of these alterations will boost your monthly payment, but some are less advantageous, particularly for higher-income earners. Here's what you can anticipate in 2025.
A substantial adjustment affecting employees
One income restriction directly impacting your benefit amount is the maximum taxable earnings limit. This threshold is the highest annual income subject to Social Security tax, and the closer your income is to this limit, the larger your benefit will be.
In 2024, the limit stands at $168,600 per annum. Starting January 2025, however, it will escalate to $176,100 per annum. Such increases are common, given that the earnings limit is intended to keep pace with cost-of-living adjustments. For instance, 20 years ago in 2004, the limit was only $87,900 per annually.
Although these limits impact everyone, they can have a more substantial impact on higher-income earners. If your income surpasses the limit, you'll be taxed on a larger portion of your earnings annually.
The increase in 2025 is anticipated to have the most significant impact on those earning between $168,600 and $176,100 per year, as you'll be subject to Social Security tax on income that wasn't taxed in 2024. With the current payroll tax rate of 12.4% (which comprises both employer and employee taxes), that additional $7,500 in income will give rise to a tax increase of $930 per year.
The positive side of higher income limits
Although paying more in taxes isn't ideal, the silver lining is that it will lead to a more substantial benefit in the future -- and you may even be eligible for the maximum monthly payments.
In 2025, the maximum Social Security payment is set to escalate from $4,873 per month to a staggering $5,108 per month. To qualify for this payment, you'll have to meet three criteria: work for at least 35 years, delay claiming benefits until age 70, and regularly reach the maximum taxable earnings limit.
As the wage cap continues to escalate year after year, it becomes more challenging to acquire the most significant possible Social Security benefit. But if you're earning enough to reach that income limit, you've already overcome what could be considered the most formidable hurdle to accessing this benefit.
Less complicated methods to enhance your benefit
What if you're not earning anywhere close to $176,100 per year? Unfortunately, this will disqualify you from the maximum payment, but you can still take measures to boost your benefit amount.
Delaying claiming benefits is one way to earn larger payments. For each month you postpone past age 62, you'll receive a slightly larger check. Filing at your full retirement age (which ranges between ages 66 and 67, depending on your birth year) will earn you 100% of your benefit, while waiting until age 70 will result in a bonus of at least 24% on top of your full payment.
The average retiree garners around $1,298 per month in benefits at age 62, according to December 2023 data from the Social Security Administration. At ages 67 and 70, that average jumps to $1,884 per month and $2,038 per month, respectively. Even if you can only delay benefits by a year or two, it can significantly boost the size of your checks.
Working longer than 35 years is another option for enhancing your payments. The first step in calculating your benefit involves taking the average of your highest-earning years throughout your 35-year career.
Given that your income is likely greater now than it was 35 years ago, chances are you're earning more now. Because only the leading-earning years are factored into your average, working more years with a higher income can replace some of the lower-earning years in your calculation -- resulting in a larger benefit.
A higher maximum earnings limit in 2025 may elevate your tax liability if you're a high earner, but it will also move you closer to a larger maximum benefit amount for Social Security. Even if you're off track for that payment, small steps can go a long way towards boosting your checks each month.
The increase in the maximum taxable earnings limit in 2025 to $176,100 per annum might result in a higher tax liability for higher-income earners, but it also brings them closer to qualifying for the maximum Social Security benefit of $5,108 per month in 2025. Delaying the claim of Social Security benefits beyond full retirement age can also lead to larger monthly payments, with a 24% bonus for those who wait until age 70.
