Social Security will soon announce the 2025 COLA, but workers should be wary of that number, too

For better or for worse, there is no shortage of Social Security changes every year. That’s just the nature of the program and has been since it was created decades ago. October, in particular, is a month that heralds huge changes for the coming year.

One of the most important announcements is the annual cost of living adjustment (COLA), which will be announced on October 10. The COLA amount can be found on the Social Security website (SSA.gov) under the “latest news” section.

The annual COLA gets a lot of attention (rightfully so), but it’s not the only important number Social Security will release in October. Workers should also be aware of changes to the basic salary cap. It may not be as exciting as COLA, but it has significant implications that make it worth keeping up with.

Image source: Getty Images.

So what exactly is the basic salary cap?

Most US workers pay Social Security taxes throughout their careers. If you have an employer, you both pay 6.2% tax, for a total of 12.4%. If you are self-employed, you are solely responsible for the full 12.4%. This is the news that could be better.

The good news is that not all income is eligible for Social Security payroll taxes. The threshold value is the basic salary limit. Any amount earned above the basic salary limit is exempt from Social Security payroll taxes and is also not taken into account when Social Security calculates your monthly benefit.

The basic salary cap changes most years

In 2024, the base salary cap is $168,600, but is likely to rise. For perspective, here are the last 10 base salary caps:

Data source: Social Security Administration.

Along with 2015 and 2016, 2009 through 2011 are the only years in which the base salary limit has remained the same ($106,800) over the past five decades, so it’s not very common to see no change.

How Social Security determines the salary cap each year

Social Security uses the National Average Wage Index (AWI) to determine the basic annual wage limit. The AWI measures the average annual wage for workers covered by Social Security.

Social Security looks at one year’s AWI and compares it to the previous year to determine if an increase in the basic wage limit is needed. For example, the national AWI for 2022 was $63,795.13, about 5.32% higher than the 2021 AWI. Therefore, the salary cap increased from $160,200 in 2023 to $168,600 in 2024.

To determine the base wage limit for 2025, Social Security will compare the 2023 national AWI to the 2022 national AWI.

If the AWI does not change or decreases, there will be no change to the basic salary cap. There will not be a situation where Social Security reduces the base salary limit.

The basic salary limit is important if you intend to receive the maximum benefit

Receiving the maximum monthly Social Security benefit ($4,873 in 2024) is a two-step process. The easier of the steps is to defer benefits until age 70. The more difficult of the steps is earning above the base salary limit for the 35 years that Social Security uses to calculate your monthly benefit.

If you want to receive the maximum monthly benefit in a given year, both criteria must be met. That’s partly why it’s important to keep up with the base salary cap. Some people may find they earn over the limit one year and then less in another year with an increase in the basic salary limit.

Add that to the tax implications of the base salary cap, and it’s worth making sure you know the number heading into 2025.