As of January 1, 2024, a series of Social Security changes took effect, influencing both the benefits received by beneficiaries and the eligibility criteria. Whether you’re currently a beneficiary or in the process of applying this year, you’ll want to be aware of these significant changes. In this article we’ll go over the most important points to know.
New Year, Bigger Checks
Annually, the Social Security Administration (SSA) implements a cost-of-living adjustment (COLA) to ensure beneficiaries can keep up with rising expenses. The adjustment considers the percentage shift between average prices in the third quarter of the present year and the third quarter of the preceding year.
The COLA for 2024 is 3.2%, so monthly payments for recipients increased by that amount beginning in the new year. According to the SSA, that’s an average monthly increase of about $50.
When it comes to the timing of your payment, it still depends on your date of birth, adhering to Social Security’s standard payment schedule. Typically, if your birthday falls within the first through 10th day of the month, your payment will be processed on the second Wednesday. For those with birthdays between the 11th and 20th day of the month, payments are scheduled for the third Wednesday. If your birthday occurs after the 20th day of the month, you can expect your payment on the fourth Wednesday.
New Year, High Social Security Taxes
Because the Social Security tax wage base also increased by 5.2%, wealthy taxpayers could be subject to higher taxes. The Social Security tax wage base for 2024 is $168,600, which is up from $160,200. This means that some workers will be paying about $521 more in Social Security taxes than they would have paid if the wage base didn’t increase. Additionally, self-employed workers are taxed at 12.4%, meaning they could owe an extra $1,041.60.
Full Retirement Age and the Earnings Test
There are two significant factors to be mindful of when it comes to Social Security benefits: full retirement age (FRA) and the earnings test.
While you can begin receiving benefits as early as age 62, you become eligible for full benefits upon reaching the FRA, determined by your birth year.
For instance, if you were born in 1962, you would reach your FRA at 67 years old. However, if you were born in 1964, your FRA would be 67 years and 8 months, requiring an additional eight months of patience compared to those born in 1962. This illustrates how FRA varies based on the year of birth, impacting when individuals become eligible for full Social Security benefits.
As for the Social Security earnings test, this becomes relevant if you’re still working and earning income while receiving Social Security and have yet to hit FRA (it’s also why many experts suggest holding off until FRA).
Essentially, surpassing a specified income threshold triggers the SSA to withhold a certain amount above that limit. In 2024, for workers who won’t reach FRA the entire year, the earnings test cap is $22,320. This means $1 in Social Security benefits will be withheld for every $2 in earnings that exceed $22,320. For workers who will reach FRA at some point during the year, the earnings test cap is $59,520. This means $1 in Social Security benefits will be withheld for every $3 in earnings that exceed $59,520.
Keep in mind, this is just a temporary hold. Once you hit FRA, your benefit checks will factor in those temporary withholdings. Also note that earnings from investments or payouts from retirement plans, for instance, are not considered in the earnings test.
According to the Social Security Administration, the last 12 Trustees Reports, which report annually on the current and projected financial status of the Social Security program, indicated that reserves will be drained between 2033 and 2035. If that happens, scheduled tax revenues will be adequate to pay only about three-fourths of the scheduled benefits. Here are some of the legislative measures that policymakers have proposed to address the issue.
Raise the Retirement Age
One proposal is to gradually increase the retirement age. Currently, the retirement age is set at 67 for those born in 1960 or later. The proposal would increase the retirement age to 68 over the next decade, and eventually to 70 for people born in 1978 or later. Proponents of the increase claim that it would reflect longer life expectancies and help to ensure the program’s long-term sustainability. Critics of the increase argue that this would disproportionately affect low-income and blue-collar workers who have physically demanding jobs and may not be able to stay in the workforce as long.
Increase Payroll Tax Rate
The payroll tax rate funds Social Security. Employers and employees each pay 6.2 percent of wages up to the taxable maximum of $160,200 (the self-employed pay 12.4 percent). Under this proposal, the tax rate would gradually increase over the next decade, thereby garnering more revenue for the program. Advocates of this approach assert that it would be a fair way to fund the program, as it would require higher earners to pay more into the system. However, those against this move argue that it could discourage economic growth.
Invest in Private-Sector Stocks and Bonds
Social Security funds are invested in special-issue government bonds, and these bonds have a lower rate of return than stocks or other investments. Proponents of this move argue that investing Social Security funds in a diversified portfolio of stocks and bonds could potentially earn higher returns and increase the program’s financial sustainability. Critics point out the obvious risks and market volatility associated with investing in the stock market.
Change the Way Benefits Are Calculated
Social Security Benefits are based on a worker’s highest 35 years of earnings, adjusted for inflation. One proposal is to implement a formula that is less generous to higher earners. While this could address Social Security’s regressive aspects, where higher earners receive more benefits than lower earners, critics argue that this could disincentivize workers to increase their earnings and could dissuade entrepreneurship.
Invest in Private IRAs and Savings Accounts
Finally, some lawmakers have recommended creating individual retirement accounts (IRAs) or other private savings accounts as alternatives to Social Security, allowing individuals to invest a portion of their earnings in the stock market or other investments. While this would grant individuals more control over their retirement savings, and could potentially earn higher returns than the Social Security system, critics point out that private accounts expose individuals to market volatility, and that the Social Security program provides a safety net for individuals who may not have the means or knowledge to invest in private accounts.
Retirees are feeling the effects of soaring inflation, and it’s stretching their budgets. More than 70 million retired Americans depend on a Social Security benefit program as a source of income, especially during economic downturns, so annual changes to payouts are always expected. Read on to learn what’s in the cards for Social Security benefits next year, including a higher payout.
COLA Boost
Get ready for a historic increase to 2023’s cost-of-living adjustment (COLA). 2022 saw an adjustment of 5.9%, which was already uncommonly high, but in 2023 monthly checks will increase by 8.7%. That’s approximately $146 per month ($1,752 per year) for the average retiree. This is the highest COLA increase since 1981. All retirees currently receiving Social Security benefits will see this increase in January of 2023.
Maximum Taxable Earnings Will Increase
Due to an increase in average wages, Americans will see more Social Security taxes taken from paychecks in 2023 because more of their income will be liable for the tax. Maximum earnings subjected to Social Security taxes will increase from $147,000 in 2022 to $160,000 in 2023. This means that workers paying into the system are taxed on wages up to this amount, typically at the 6.2 percent rate.
Maximum Social Security Benefit Also Set to Increase
The maximum benefit for retired workers who claim Social Security at full retirement age — which is 67 for anyone born after 1960 — will be $3,627 in 2023, up 8.4% from $3,345 in 2022. Take note that the maximum benefit will be different for those who claim benefits before the full retirement age, and the same can be said for those who claim benefits after the full retirement age. For instance, if you begin claiming benefits at age 62, your maximum monthly benefit in 2023 will be $2,572. On the other end of the spectrum, if you begin claiming benefits at age 70, your maximum monthly benefit in 2023 will be $4,555.
Work Credits Will Be Harder to Reach
In order to earn retirement benefits, workers must accumulate at least 40 work credits during the whole of their careers. The maximum number of credits eligible to be earned per year is four, and the value of each credit fluctuates from year to year. In 2023, a single credit will be worth $1,640, up from $1,510 in 2022. Thus, workers will need to earn more income in order to collect the credits they need to retirement benefits.
While Social Security typically plays a role in planning for retirement, it’s important to be clear on the specifics of this benefits program. It definitely can be a source of financial support, but there are a few realities to be aware of so you’re not caught off guard when the time comes to make use of these benefits.
Social Security Benefits Fall Far Short of Replacing Income
In fact, Social Security replaces only about 40% of pre-retirement income. When you retire it’s generally advised to have enough money coming in to replace at least 80% of pre-retirement income in order to avoid a major drop in quality of life. Income from sources such as a pension or savings will be needed to fill the gap.
Your Benefits Could Be Taxed
Approximately 50% of retirees pay some federal taxes on their Social Security benefits. This is because their combined income from Social Security and other sources bumps them above the thresholds for taxes to kick in. These thresholds—$25,000 for single people and $32,000 for married joint filers—aren’t indexed to inflation. Due to natural wage increase, more and more people are going to end up with provisional incomes above the stated thresholds, so the percentage of Americans who are required to pay some taxes on Social Security benefits is expected to increase over time.
Medicare Premiums Are Deducted from Your Social Security
If you receive Social Security benefits and you are enrolled in Medicare Part B (the portion of Medicare that provides standard health insurance), the premiums for Medicare are typically automatically deducted from Social Security payments.
Claiming Benefits Early Could Result in Smaller Monthly Checks
If you opt to begin receiving Social Security before your full retirement age, you will not get your standard benefit amount. Full retirement age differs by birth year, but it ranges between 66 and 2 months and 67 years old. Depending on how far you are from your full retirement age when you start claiming benefits, you could fall short of your benefit rate by as much as 30%.
