Social Security is a cornerstone of retirement planning for millions of Americans. In 2025, several key changes are on the horizon, from benefit adjustments to tax thresholds. Additionally, looming challenges to the program's long-term sustainability raise important questions about its future.
Let’s walk through these updates, explore how they could impact your retirement and taxes, and discuss the possible changes proposed under the Trump administration so you are prepared for what’s ahead.
Changes Coming to Social Security in 2025
Cost-of-Living Adjustment (COLA)
In 2025, Social Security benefits and Supplemental Security Income (SSI) payments will increase by 2.5%. This Cost-of-Living Adjustment (COLA) is designed to help beneficiaries keep up with rising living costs, especially considering persistent inflation. While modest, this increase provides much-needed relief for those on fixed incomes.
Increased Payroll Taxes
The maximum earnings subject to Social Security tax will rise to $176,100 in 2025, up from $168,600 in 2024.
This change primarily impacts high earners. For example, someone earning $200,000 annually will pay Social Security taxes on an additional $7,500, resulting in $465 more in payroll taxes (6.2% of $7,500). This adjustment increases contributions to the program but may also raise tax burdens for higher-income workers.
Earnings Test Adjustments
For beneficiaries under Full Retirement Age (FRA), the earnings test limit will increase to $23,400 in 2025. This means you can earn up to this amount while claiming benefits without reductions.
For example, if you’re 64 and earning $30,000 annually, $6,600 of your income exceeds the threshold. Social Security would withhold $1 for every $2 above the limit, reducing your benefits by $3,300 that year. These benefits are usually withheld from the first Social Security checks of the year, even reducing them to $0 until the full limitation has been offset. Then your full benefit is reinstated. Reductions made to your benefits are not ultimately lost; they are added back to your benefits once you reach full retirement age.
Long-Term Challenges
Funding Shortfall
The Social Security trust funds are projected to run out of reserves by the mid-2030s. Without intervention, beneficiaries could see their payments reduced by about 23% once reserves are depleted.
For example, if you’re expecting $2,500 in monthly benefits in 2035, a 23% reduction would cut your payment to $1,925—a significant loss for retirees relying heavily on Social Security.
This shortfall is largely driven by:
Aging Population
The number of baby boomers retiring has dramatically increased, creating a surge in beneficiaries. This shift has offset the balance between retirees drawing benefits and younger workers contributing to the system.
Longer Life Expectancies
When Social Security became law, the life expectancy was between 61 and 65. It is now between 75 and 80. This means Social Security is having to pay retirees for far longer than it was originally designed to do.
Stagnant Wage Growth
While inflation has steadily risen, wages haven’t kept up, limiting payroll tax revenues. This mismatch has exacerbated the program’s funding gap, as the cost of living outpaces the funds collected. This is one reason high-wage earners are paying more payroll taxes. In 2000, just $76,200 of income was taxed for Social Security compared to $176,100 in 2025.
Proposed: Changes Under the Trump Administration
Former President Donald Trump’s proposals for Social Security offer a mix of benefits and challenges. While some measures would provide immediate relief to retirees, they could worsen the program's financial instability.
Eliminating Taxation of Social Security Benefits
This popular proposal would remove taxes on Social Security benefits; however, unlike other tax revenue, this revenue goes into the Social Security trust fund and is crucial for funding the program. This tax cut would almost entirely benefit high-income retirees, as Social Security benefits are already taxed at 0% for Americans with the lowest incomes.
Ending Taxes on Overtime and Tips
While eliminating these taxes would reduce burdens on workers, it would also decrease payroll tax revenues—the lifeblood of Social Security.
Key Findings by the Committee for a Responsible Federal Budget (CRFB)
Increased Cash Shortfall: The proposals could add $2.3 trillion to Social Security’s cash deficit between 2026 and 2035.
Accelerated Insolvency: Insolvency could occur by 2031, three years earlier than current projections.
Deeper Benefit Cuts: Benefit reductions could increase from 23% to 33% by 2035 without meaningful reforms.
Proposed: The Social Security Fairness Act
The Social Security Fairness Act passed the House in November and Senator Chuck Schumer indicated it will soon get a vote in the Senate. The bill would repeal two current benefit limitations known as the Windfall Elimination Provision and the Government Pension Offset, both of which impact retirees with pensions from jobs that operate outside the Social Security system.
Windfall Elimination Provision
When employees spend part of their career in public jobs, they often pay into their own pension systems rather than Social Security. These pensions become the source of their retirement income. At some point, these workers may also work in private sector jobs that pay into the Social Security system, albeit in smaller amounts. The issue is that Social Security benefits are weighted to pay more to those with smaller incomes, and those who earned only a small amount of income subject to Social Security appear to be part of this low-income group. They only appear to be low-income because they earned most of their income outside the Social Security system. The WEP addresses this imbalance by limiting their benefits to take into account the years they worked in public jobs.
Government Pension Offset
A spouse or survivor of an employee who pays into Social Security is typically entitled to benefits on that earner’s record. This was enacted to help provide benefits for spouses who did not work outside the home. The issue is that spouses and survivors who worked outside the Social Security system can appear like they never worked because their earnings don’t get reported to Social Security. As a result, before GPO, spouses with their own government pensions were being treated like they had no retirement income and therefore qualifying for a spousal or survivor benefit from Social Security. The GPO was put into place to limit the amount of benefits these spouses and survivors received so it wasn’t disproportional to other retirees and their spouses.
Key Findings by the Committee for a Responsible Federal Budget (CRFB)
Accelerated Insolvency: Eliminating the WEP and GPO is estimated to accelerate the trust fund’s insolvency by six months, further reducing future benefits.
Important Considerations for the Social Security Program
While several solutions have been proposed to address Social Security’s challenges, many are politically unpopular, making progress difficult.
Raising Taxes
Increasing payroll taxes or lifting the taxable maximum could bring in more revenue, but such measures often face strong political resistance.
Cutting Benefits
Reducing benefits for higher-income retirees or adjusting benefit formulas could lower costs but is unlikely to gain widespread support.
Increasing the Retirement Age
Raising the retirement age reflects longer life expectancies but could disproportionately affect workers in physically demanding jobs.
Adjusting Trust Fund Rules
The law currently requires Social Security to be funded by workers who are paying into the system and by the trust fund. It was designed this way to help the bill originally pass and to reinforce the idea that Social Security is a benefit you pay into, not a government-paid program. This rule could be changed by Congress, which would allow Social Security benefits to be made up from other sources of revenue in the government budget. If no other reforms occur and lawmakers want to avoid future benefit cuts, Congress could allow benefits to be funded by something other than Social Security revenues. While that would stem the immediate problem of benefit cuts, it would further add to our deficit and debt.
A combination of these reforms may be necessary to preserve the program’s long-term viability, but delays in action only make the required changes more drastic.
In Conclusion: Plan Ahead
For retirees and workers alike, proactive planning is essential. Diversify your income, maximize your benefits, and prepare for potential changes. Without reforms, Social Security may not be the cornerstone of retirement income it was imagined to be in FDR’s New Deal. Nevertheless, lawmakers have shown, even in the face of a shrinking trust fund, that they are more willing to expand Social Security benefits than they are to limit them. While that portends other issues, it also is a good sign that they will do what is necessary to avoid reducing benefits, especially for current retirees.