Retirees can expect to see big changes in 2025 when it comes to their Social Security and Medicare benefits.
President Joe Biden is expected to sign a bill that will increase Social Security benefits for certain pensioners. Additionally, Social Security’s annual cost-of-living adjustment takes effect for all beneficiaries.
And Medicare enrollees who are worried about health care costs now have a $2,000 annual out-of-pocket limit on Part D prescription drugs intended to help reduce those financial pressures.
Here are some important changes to keep in mind for next year.
Some pensioners could get a benefit increase
The Senate passed a bill in the final legislative days of 2024 to increase Social Security payments for millions of people who receive pensions from working in federal, state and local government, or in public service jobs such as teachers, firefighters and police officers. The House passed the bill in November.
Biden is now expected to sign the bill into law in the coming days.
The Social Security Fairness Act eliminates two provisions that reduce Social Security benefits for certain people who also have pension income from public jobs where Social Security payroll taxes were not paid.
That includes the Windfall Elimination Provision, or WEP, which reduces Social Security benefits for people who also receive pension or disability benefits from employers who did not withhold Social Security taxes.
It also includes Government Pension Offset, or GPO, which reduces Social Security benefits for spouses, widows and widowers who receive their own government pensions.
Altogether, the rules affect about 2.5 million beneficiaries, according to the Congressional Research Service. Once enacted, the law can provide higher benefit payments to those people.
In particular, it may provide retroactive payments of those benefit increases for months after December 2023.
The legislation marks the biggest change to Social Security since certain couples claiming strategies were eliminated in 2016, said Martha Shedden, president of the National Association of Registered Social Security Analysts.
“We’re kind of in limbo as to how that process will play out, when people will see that increase and how the retroactive effect will be applied.” [benefits] will be enforced,” Shedden said.
All Social Security beneficiaries will get 2.5% COLA
In 2025, all beneficiaries will see a 2.5% increase in their Social Security benefit checks, thanks to an annual cost-of-living adjustment.
It is noteworthy that the increase in 2024 was 3.2%. This year’s COLA is the lowest increase beneficiaries have seen since a 1.3% increase in 2021, reflecting a slowing pace of inflation.
The change will take effect with January checks for more than 72.5 million Americans, including Supplemental Security Income recipients.
Workers’ average retirement benefit will be $1,976 per month, up from $1,927 in 2024, according to the Social Security Administration.
Monthly Medicare Part B Premiums Increase
Monthly Medicare Part B premiums, which are often deducted directly from Social Security checks, can affect the increase beneficiaries will see in their 2025 benefit payments.
Medicare Part B covers medical, outpatient hospital and certain home health services, as well as durable medical equipment.
In 2025, the standard monthly Part B premium will be $185 per month, an increase of $10.30 from $174.70 in 2024.
Part B deductibles will also increase, to $257, in 2025, an increase of $17 from the annual deductible of $240 for 2024.
Medicare Part B premiums are based on the beneficiary’s modified adjusted gross income, or MAGI, from their tax returns from two years prior. In 2025, beneficiaries who had less than or equal to $106,000 in MAGI in 2023 will pay the standard monthly Part B premium, as will married couples with less than or equal to $212,000.
Beneficiaries with higher incomes will be subject to income-related adjustment amounts, or IRMAA, which increase their monthly premium payments.
$2,000 Medicare Prescription Drug Limit Goes into Effect
Annual out-of-pocket costs for Medicare Part D drugs will now be capped at $2,000 as changes enacted with the Inflation Reduction Act take effect.
Beneficiaries with Medicare Part D drug plans that have a deductible will pay out-of-pocket costs until that threshold is met. In 2025, the highest deductible for those plans is $590.
Once beneficiaries pay their full deductible, they will owe 25% of the cost coinsurance until their out-of-pocket costs for generic and brand name drugs reach $2,000. After that, those beneficiaries will have what’s known as catastrophic coverage, meaning they won’t have to pay Part D out-of-pocket costs for the rest of 2025.
However, beneficiaries will also have the option to pay out-of-pocket costs monthly throughout the year, rather than paying them all at once.
Notably, insulin costs have also been capped at $35 per month, for both Medicare Part D-covered treatments and Medicare Part B-covered insulin used with pumps.
The exhaustion dates for Social Security trust funds are approaching
In 2024, Social Security trustees projected that the trust fund the program relies on to help pay retirement benefits could be depleted in 2033. At that time, only 79% of those benefits could be payable, unless the Congress act sooner.
The combined Social Security trust funds, used to pay retirement and disability benefits, are projected to be depleted in 2035.
Now that the calendar has turned to a new year, those sell-out dates are closer.
In particular, the Social Security Fairness Act mentioned above, which will provide increased benefits to some pensioners, may move up the trust fund depletion date by six months.
“That’s the biggest issue looming right now: what can be done to shore up those trust funds,” Shedden said. “That will require very comprehensive, bipartisan changes to multiple parts of the Social Security rules in the program.”
However, most financial advisors emphasize that this should not affect personal claims decisions.
For younger generations, there could be changes to future benefits, said George Gagliardi, certified financial planner and founder of Coromandel Wealth Strategies in Lexington, Massachusetts.
“But for those who already receive or are about to receive Social Security checks, I don’t think there is anything to worry about,” Gagliardi said.
Other important changes to note
- Maximum taxable earnings (the amount of wages subject to Social Security payroll taxes) will increase to $176,100 in 2025, up from $168,600 in 2024. Once workers reach that limit, they will no longer pay into the program for the remainder of the year.
- Social Security beneficiaries who claim benefits before their full retirement age and who continue to work face what is known as a retirement income test. Income exempt from the retirement income test is now $23,400 per year in 2025 for those below full retirement age, up from $22,320 per year in 2024. For every $2 of income above the limit, $1 is withheld in benefits. For the year a person reaches retirement age, a higher threshold of $62,160 in earnings applies, up from $59,520 in 2024. For every $3 in earnings above the limit, $1 in benefits is withheld. Importantly, this only applies to the months before a beneficiary reaches full retirement age. Starting in the month of your birthday, the retirement income test no longer applies. Importantly, once a beneficiary reaches full retirement age, any benefits previously withheld are applied to monthly benefits.
- Do you want to talk to the Social Security Administration face to face? Starting Jan. 6, the agency will require appointments for local office services, such as obtaining Social Security cards. To improve efficiency, the agency is telling people who need help to first try its online or automated phone services. However, people who cannot schedule in-person appointments, especially vulnerable people, can still come and receive service in person.
