What retirees should know about these important benefits heading into the new year
Out with the old, in with the new, the saying goes. And for retirees, or anyone saving and planning for retirement, there is plenty that is indeed new. As we enter 2025, here's a roundup of what you need to know, along with a look at what Washington's new political landscape could mean.
Retirement savings
-- Individual retirement account (IRA) contribution limits will continue to be $7,000.
-- 401(k) contribution limits will rise $500 to $23,500.
-- Workers age 60 to 63 will be able to make larger catch-up contributions to their 401(k), with new limits set at either $10,000 annually or 150% of the standard catch-up contribution limit - whichever is greater.
-- Participants in most 401(k), 403(b), governmental 457 plans, and the federal government's Thrift Savings Plan who are 50 and older can contribute up to $31,000.
Some provisions related to the Secure 2.0 federal retirement law go into effect - meaning that workers could be automatically enrolled in workplace retirement plans.
Read: The IRS just set 401(k) limits for 2025 - here's how much you can save
Social Security
After 2024's increase of 3.2%, Social Security recipients will get a more modest cost-of-living adjustment (COLA) in 2025: 2.5%. Why 2.5%? The COLA is tied to the inflation rate, says the Social Security Administration, and inflation has come down to 2.5%. For the average recipient, the increase means about $50 more each month.
Meanwhile, the first $176,100 of worker wages will be subject to Social Security taxes next year, up 4.4% from this year's $168,600. Anyone fortunate enough to have a salary bigger than $176,100 doesn't pay a nickel in Social Security taxes beyond that threshold.
The venerable Social Security program - which has faithfully kept its obligation to Americans since it began under President Franklin D. Roosevelt in 1935 - continues on a problematic path. It has been paying out more than it has been taking in from payroll taxes for several years now, and unless something is done, it may have to cut benefits by as much as 21% as soon as 2033 - now just eight years away.
You might say "Eight years? That's plenty of time, they'll fix it." But I've been writing about this issue for more than a decade now, and so far, our Washington politicians - both Republicans and Democrats - haven't done a thing.
"The time between now and the time that [these cuts] would occur has shortened dramatically," says Alicia Munnell, the outgoing director of the Center for Retirement Research at Boston College and a MarketWatch contributor.
"It should be higher on everybody's agenda that we fix it," Munnell tells me. "It's just a question of political will to sit down and get it done."
That's the part that concerns me.
Read: A retirement expert's best advice? Don't retire.
The continuing political standoff is easy enough to explain. In general, Republicans don't want to raise taxes, such as lifting the cap on income subject to Social Security taxes, while Democrats oppose cutting benefits, such as lifting the eligibility age. Too bad "compromise" is a bad word in today's Washington, because that's how this problem will get fixed. In the meantime, 2033 approaches. Tick, tick, tick.
Medicare
The Inflation Reduction Act of 2022 that was championed by President Joe Biden will continue to pay off for Medicare patients in 2025. Already, the cost of insulin is capped at just $35 a month, and that applies to both Medicare Part B and D plans. Further savings kick in next month, when Medicare Part D plans cap out-of-pocket spending on covered drugs at $2,000 a year. The cap covers deductibles, copayments and coinsurance for covered drugs.
Given that overall healthcare costs continue to rise, this $2,000 cap looks to be a huge benefit for seniors. The standard premium for Medicare Part B - which covers doctor's visits, routine cancer screenings, home healthcare and other outpatient services - will be $185 for 2025, an increase of about 5.7% from 2024. Medicare officials say that Part B beneficiaries with individual incomes higher than $106,000 will pay more; the exact figure depends on those incomes.
Looking further down the road, the Inflation Reduction Act will result in sharp price cuts - 38% to 79% - for 10 of Medicare's most expensive drugs. This will be of huge benefit to millions of Medicare recipients.
I mentioned the fiscal problems looming over Social Security. What about Medicare? Current projections from the Medicare Board of Trustees show that the Medicare Part A (hospital insurance, or HI) trust fund is projected to be depleted in 2036. That's better by five years from last year's projection, thanks to higher-than-expected revenues and lower projected spending.
But broader issues still must be addressed. "Medicare," Munnell says, "is a very expensive system, and it's projected to be more expensive over time because it operates in a really high-cost healthcare environment. And we as a nation just spend so much more on healthcare than any other developed country, and we have much less good outcomes [than other developed countries]."
True enough, but this isn't just a Medicare issue, she emphasizes. "It's a national healthcare problem and we need to get our healthcare costs under control," Munnell says. "We have too many players: We have insurance companies and we have doctors and we have hospitals and we have private equity in all this."
But there are concerns that in the Washington of 2025, Medicare could be a target for lawmakers looking to rein in federal spending.
"It's at risk," claims Linda Benesch of Social Security Works, a nonprofit advocacy organization, because Republicans may try to make Medicare cuts to pay for an extension of Trump's first-term tax cuts. "They want to impose spending caps that would deny many Americans, including many seniors who are eligible for both Medicare and Medicaid, the care they need," she says.
The Washington Post reported last month that spending caps are indeed being discussed by Republican lawmakers, while two weeks ago, the powerful House Budget Committee said at a hearing that it was "sounding the alarm" over the nation's mounting debt. The hearing featured numerous mentions of Medicare spending.
The chairman of the committee, Rep. Jodey Arrington, a Texas Republican, later told reporters that one idea to rein in costs could be a "responsible and reasonable work requirement" for Medicaid benefits, similar to work requirements that exist for other aid programs like food stamps. He added that more stringent eligibility checks for Medicare are also a possibility. Efforts to reach Arrington for further comment were unsuccessful.
Federal budget difficulties aside, I suspect that any legislative efforts to trim social safety-net programs in 2025 will run up against the same roadblocks that have always impeded past efforts.
First among these is the fierce resistance from citizens who rightly squawk in the abstract about spending, and how something needs to be done - just not about things which could have an adverse effect on them.
There are Social Security and Medicare recipients in every congressional district. They are organized, and they vote. There's a reason there has not been meaningful entitlement reform in four decades. Don't look for it to happen in 2025, either.
-Paul Brandus
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