Every October, the Social Security Administration (SSA) adjusts to Social Security programs to keep pace with inflation. These adjustments then go into effect the following January. The most significant of these annual changes are typically the Cost-of-Living-Adjustments (COLA), the annual tax caps and earning limit increases.

This article is intended as general education information only and is not meant to convey specific tax advice. To discuss your specific situation, speak with a with a qualified tax professional.

Cost of Living (COLA)

What is COLA? Since 1975, Social Security recipients have received Cost-of-Living-Adjustments (COLA) every year. The purpose of the COLA is to ensure that the buying power of Social Security and Supplemental Security Income (SSI) benefits is not eroded by inflation.¹

The SSA increased the COLA for 2025 to 2.5% in addition to several other increases in benefits.² This demonstrates that the rate of inflation over the last year has continue to slow. The increase in COLA for 2025 is lower than last year's increase of 3.2%, and just below the 10-year average COLA increase of 2.6%.³

You'll be notified by mail starting in December about your new benefits. You can review your new benefit amounts online through individual My Social Security accounts at SSA.gov.

Annual Tax Cap

In addition to the COLA increase, the income subject to Social Security taxes is capped each year (called maximum taxable earnings). Maximum earnings subject to Social Security taxes for 2025 is $176,100, which is a significant increase from $168,600 in 2024.⁴ We expect to see the earnings cap continue to increase as it's the primary tool that Social Security has used to increase funding into the program.

Earning Limit Increase

Social Security benefits might change if you are working while collecting benefits and have not yet hit your full retirement age. If you plan to work part or even full time after you elect Social Security, you need to be aware of the potential earnings limit.

If your income exceeds the annual earnings limit while collecting benefits (before you reach your full retirement age) your Social Security benefit will be reduced for the remainder of the year in which you exceeded that limit. However, the income that is withheld will be paid out once you reach full retirement age.

It is important to note that investment income does not count toward your annual earnings limit; the only income that counts is earned income by working for a company or as a self-employed person.⁵

• If you won't yet reach full retirement age in 2025, you'll be subject to an annual earnings limit of $23,400. If you make more than that amount, the SSA will deduct $1 from your benefits for every $2 you make above the limit.
• If you will reach full retirement age sometime during 2025, the limit on your earnings is much higher at $62,160. But your benefits will be reduced at the rate of $1 for every $3 you make above that limit.
• The month you reach full retirement age, you will no longer be subject to a limit on your earnings.

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Sources

1.     "Cost-Of-Living Adjustments." SSA.gov, Social Security Administration, https://www.ssa.gov/oact/cola/colaseries.html. Accessed 10 October 2024.

2.     "Social Security Announces 2.5 Percent Benefit Increase for 2025." SSA.gov, Social Security Administration, https://www.ssa.gov/news/press/releases/2024/#2024-10-10. Accessed 10 October 2024.

3.     "Cost-Of-Living Adjustments." SSA.gov, Social Security Administration, https://www.ssa.gov/oact/cola/colaseries.html. Accessed 10 October 2024.

4.     "Social Security Announces 2.5 Percent Benefit Increase for 2025." SSA.gov, Social Security Administration, https://www.ssa.gov/news/press/releases/2024/#2024-10-10. Accessed 10 October 2024.

5.     "Cost-of-Living Adjustment (COLA) Information for 2025." SSA.gov, Social Security Administration, https://www.ssa.gov/cola/. Accessed 10 October 2024.