Social Security will see several major changes take effect on Jan. 1. Some of them, like the 2.5% cost-of-living adjustment (COLA), will affect all program recipients.
But a small group of Social Security beneficiaries will reach a major milestone next year that will have them earning larger checks than anyone has in the history of the program. Here's how to know if you'll be among them.
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How the Social Security Administration calculates your benefits
Before we dive into the 2025 changes, it helps to have a basic understanding of how the Social Security Administration determines someone's benefits. There are actually three parts to the calculation:
Step 1: Calculate your average indexed monthly earnings (AIME)
The government does this by looking at your average monthly earnings during your 35 highest-earning years. It indexes them for inflation by taking the earnings you paid Social Security taxes on for each year, multiplying them by the index factors in place for the year you turned 62, and totaling the results. Then, it divides this by 420 -- the number of months in 35 years -- to arrive at your average indexed monthly earnings (AIME).
Step 2: Plug your AIME into the benefit formula that applies to the year you turned 60
The current Social Security benefit formula looks like this:
- Multiply the first $1,174 of your AIME by 90%.
- Multiply any amount over $1,174 up to $7,078 by 32%.
- Multiply any amount over $7,078 by 15%.
- Add the results from the three steps above and round down to the nearest $0.10.
In this calculation, $1,174 and $7,078 are known as the bend points. These are the only things that change each year. You need to use the bend points from the year you turned 60. The result of this step is your primary insurance amount (PIA).
Step 3: Adjust your PIA based on your claiming age
Your monthly benefit is equal to your PIA only if you claim Social Security at your full retirement age (FRA). If you claim earlier, you lose 5/9 of 1% per month (6.67% per year) for up to 36 months of early claiming. Those who claim more than 36 months early lose an extra 5/12 of 1% per month (5% per year). So those who claim right at 62 can shrink their checks by up to 30%.
Delaying benefits beyond your FRA increases your checks by 2/3 of 1% per month (8% per year) until you reach 70. This is when you qualify for your maximum benefit.
2025 will see the first checks worth over $5,000
Now that you understand how the government calculates benefits, it's pretty easy to see why benefits rise over time. Wages have risen over time, which increases AIMEs. Bend points also rise, which means more of your AIME falls into the 90% and 32% tiers of the benefit calculation, leading to larger PIAs.
Maximum benefits increase too, and in 2025, the maximum benefit will exceed $5,000 for the first time. It came close in 2024 with a maximum benefit of $4,995. But next year's top Social Security beneficiaries will receive $5,108 per month. That's nearly $62,000 annually.
Unfortunately, most Americans won't get anything close to that. To earn the maximum benefit, you must have worked at least 35 years and earned the maximum income subject to Social Security tax in each of those years. That means earning in the ballpark of $168,600 or more in 2024 dollars in all 35 years. And then you have to delay benefits until 70. It's not feasible for most people.
However, all Social Security beneficiaries will still get a boost next year. The annual cost-of-living adjustment (COLA) came in at 2.5%. That will raise the average monthly benefit from $1,927 per month to $1,976 per month. You could get even more than this if your current checks are larger than $1,927.
You can estimate your future checks by adding 2.5% to your current benefit. The government will also send out personalized COLA notices in December that will list your exact 2025 benefit so you can plan your budget for next year.
