Change is constant, especially when it comes toSocial Security.The program is updated every year to ensure that beneficiaries get the best possible care and that the system is in line with the changes in society. Knowing these changes is paramount for new retirees, so if you are retiring in 2025, these are some of the things you should keep in mind.

How Your Social Security Benefits Are Determined

Most people know this, but just in case you do not,Social Security paymentsare based on your records of your 35 highest earning years. When you work, you pay payroll taxes to theSocial Security Administration (SSA).Based on how much you paid in taxes, aka, how much you earned, your benefit will be calculated.

This is why it is key to ensure that you communicate any changes in your employment or earnings to theSSA.Check yourmy social Security accountif you have one, or create one if you do not, and ensure that the information theSSAhas about you is correct, as it is easier to correct the record as it is happening than waiting years.

Full Retirement Age

According to theSSA full retirement age (FRA)is the age at which you are entitled to your full monthly payment based on your career earnings record. This age varies depending on your year of birth and it has been adjusted for years to increase it form 65 to the current 67. Having said that, waiting until you turn 70 to collect benefits will most likely work on your favor as it is the age at which you can receive themaximum benefit.

Cost-of-Living Adjustment

Despite being called fixed income,Social Security beneficiariesreceive annualcost-of-living adjustments (COLA)to account for inflation. In 2025 thisCOLAwill be 2,5% which will boost theaverage retirement checkby $48 a month. TheCOLAis calculated based on a formula that takes into account the third-quarter inflation data as measured by theConsumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). There have been attempts to change theCPIused for theCPI-E,which skews the data for those over 62, giving more weight to categories like healthcare, but it still has not been implemented.

Income Taxes on Benefits

Most states do not have taxes onSocial Security benefits, but federal taxes still apply to about 40% of beneficiaries, according to theSSA.This is because even though justSocial Security incomeis not taxed, many people have other sources, like retirement accounts or passive income that means that they qualify forfederal taxes.

For individuals who file as single and have not reachedFRA, Social Security benefitsare not taxed if their provisional income is below $25,000, while the threshold increases to $32,000 for married couples filing jointly. If provisional income falls between $25,000 and $34,000 for single filers or $32,000 and $44,000 for joint filers, up to 50% ofSocial Security benefitsmay be subject to taxes. For incomes exceeding these ranges, as much as 85% of benefits could be taxable. However, for those who start collectingSocial Securityafter reaching full retirement age in 2025, no taxes will apply to their benefits.

Earnings Test

Contrary to popular belief, receiving benefits while working is possible, although the benefits you receive will be reduced due to anearnings testthat reduces your benefits before you reachFRA.

If you are belowFRAfor the whole year, theSSAwill reduce your benefits by $1 for every $2 earned over the annual limit, counting only earnings made up to the month before reachingFRA.In 2024, the earnings limit for recipients who haven t reachedFRAis $22,320, and it will increase to $23,400 in 2025.

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