For nearly 90% of the more than 49 million retired workers who receive a Social Security benefit each month, the program represents a financial lifeline that helps cover their expenses.
But America's top retirement program -- which is responsible for pulling more than 21.7 million people out of poverty each year, including almost 15.4 million age 65 and above -- isn't static. It's constantly changing to account for shifts in the U.S. inflation rate, longevity, and a host of other factors.
Although the Social Security Administration (SSA) won't be announcing any concrete changes to the program until the second week of October, current and prospective beneficiaries can expect six changes to take effect in 2024.
Image source: Getty Images.
1. Social Security's cost-of-living adjustment should result in a modestly beefier benefit
The most-watched change in the upcoming year is the cost-of-living adjustment (COLA), which represents the "raise" passed along most years to account for the rising price of goods and services (inflation). In other words, it's a mechanism designed to ensure that the purchasing power of Social Security income doesn't decline over time.
In 2023, beneficiaries received the highest COLA (8.7%) in 41 years, as well as the largest nominal dollar-benefit increase in history: about $146 per month for the average retired worker. The cost-of-living adjustment for 2024 is expected be modest in comparison.
Following the release of the June inflation report by the U.S. Bureau of Labor Statistics, the nonpartisan senior advocacy group The Senior Citizens League (TSCL) estimated Social Security's COLA will be 3% in 2024. Considering that the average retired worker brought home $1,837.29 in June 2023, a 3% "raise" would equate to an extra $55 per month next year.
Unfortunately, the purchasing power of a Social Security dollar has been declining fairly regularly since the start of the century, according to TSCL. Regardless of how large the benefit bump is in 2024, it won't come close to addressing the estimated 36% loss of purchasing power seniors have contended with since 2000.
2. The rich are probably going to pay more
Another big Social Security change in the upcoming year is that high-earning workers will be opening their wallets a bit wider.
The Social Security program has three funding sources:
- The 12.4% payroll tax on earned income, which includes wages and salary, but not investment income.
- The interest income generated from the program's more than $2.8 trillion in asset reserves, which are held in special-issue bonds and certificates of indebtedness, as required by law.
- The taxation of Social Security benefits for individuals and couples filing jointly whose provisional income tops preset thresholds.
The payroll tax is responsible for about 90% of what the Social Security program collects in revenue. In 2023, payroll taxes are applied to all earned income up to $160,200, with $160,200 representing the maximum taxable earnings cap. This figure rises most years on par with the National Average Wage Index (NAWI). With the NAWI expected to increase, it means the maximum taxable earnings cap will also likely rise in 2024.
Since only 6% of Americans reach the maximum taxable earnings cap in a given year, 94% of workers won't be affected.
3. The maximum monthly benefit should tick higher
Whereas high earners can expect to pay a bit more in taxes to the Social Security program in 2024, some lifetime high earners collecting a Social Security benefit might see their checks grow larger.
Just as Social Security caps how much of a workers' earnings are applicable to the payroll tax, the program also limits how much a beneficiary can receive each month at full retirement age. For instance, the maximum monthly payout at full retirement age climbed $282 a month to $3,627 in 2023. Given that the U.S. inflation rate is still climbing, albeit more modestly, the maximum monthly payout should be expected to move higher in 2024.
For those curious, three criteria need to be met to receive the maximum Social Security benefit:
- Retired workers must wait until their full retirement age to begin collecting their payout.
- Retirees must have worked at least 35 years to avoid having the SSA average a $0 into their calculation for every year fewer than 35 worked.
- Workers must have reached or surpassed the maximum taxable earnings cap for all 35 years that are used to calculate their payout.
All told, about 2% of retired workers qualify for the maximum monthly benefit.
Image source: Getty Images.
4. Early filer withholding thresholds are expected to increase
A fourth big change that could affect quite a few Social Security beneficiaries is the expected adjustment of income thresholds for early filers, under the retirement earnings test. Approximately 65% of the more than 47 million retired workers receiving a payout in 2021 claimed their benefit prior to reaching their full retirement age.
There are a couple of ways the Social Security program penalizes retirees who claim benefits early, such as permanently reducing their monthly payout. Another way is through the retirement earnings test, which allows the SSA to withhold some, or all, of a retired workers' benefits, based on their income.
For beneficiaries who won't reach their full retirement age in 2023 and are still working, the SSA can withhold $1 in benefits for every $2 in earned income above $21,240 ($1,770 a month). Meanwhile, if they will reach their full retirement age at some point in 2023, the SSA can withhold $1 in benefits for every $3 in earned income above $56,520 ($4,710 a month).
Next year, these withholding thresholds should modestly climb along with inflation. In other words, early filers will be able to earn some extra income without being subjected to the retirement earnings test.
Note: Once beneficiaries reach their full retirement age, they're no longer subjected to benefit withholding by the SSA.
5. The income thresholds for workers with disabilities are likely to rise
Early filers aren't the only group of Social Security recipients who may be allowed to bring home additional income in 2024. The more than 8.7 million workers with long-term disabilities should see changes to their income thresholds as well.
In order to qualify for continued disability benefits from Social Security, workers are allowed to bring home only a certain amount of income each month. This year, workers with disabilities other than blindness can continue to receive benefits as long as their take-home income isn't above $1,470 a month. Blind workers with disabilities have the ability to earn up to $2,460 per month without having their benefits stopped.
Given that the U.S. inflation rate has moderated but is, ultimately, still climbing, the expectation would be for a modest upward adjustment in the income thresholds for workers with disabilities next year.
6. The bar to qualify for Social Security benefits will almost certainly be raised
The sixth and final Social Security change to expect in 2024 is that it'll be incrementally tougher for workers to qualify for a Social Security benefit.
Contrary to what some people might believe, being an American citizen doesn't, by itself, qualify a person to receive a Social Security benefit. The most common way an individual qualifies for a retired-worker payout is by earning 40 lifetime work credits, with a maximum of four earned annually.
In 2023, one lifetime work credit equated to $1,640 in earned income. Thus, generating $6,560 in earned income ($1,640 times 4) would maximize the number of work credits you could earn for the year. The earned-income threshold associated with these lifetime work credits tends to rise on par with inflation. Thus, in 2024, it'll likely take a little extra earned income to qualify for each work credit.
