Social Security is a vital source of income for millions of Americans, and millions more will come to depend on benefits in the future. The program plays a particularly pivotal role in keeping retired workers out of poverty, but it also provides financial security to spouses, survivors, and disabled workers. So current and future beneficiaries should make an effort to stay informed.
Unfortunately, two recent surveys hint at large knowledge gaps across the American populace. The first survey was conducted by Nationwide Retirement Institute, and it included 1,806 adults from four generations: 300 from generation Z, 500 millennials, 504 from generation X, and 502 baby boomers. The second survey was conducted by MassMutual, and it included 1,500 adults nearing retirement age (i.e., aged 55 to 65).
Based on those surveys, many Americans may be surprised by these three changes coming to Social Security in 2024.
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1. Social Security benefits will get a 3.2% cost-of-living adjustment (COLA)
According to Nationwide, 70% of survey participants incorrectly agreed with this statement: "Social Security is not protected against inflation." If those results are truly indicative of the broader population, most Americans will be surprised to learn Social Security benefits will get a 3.2% cost-of-living adjustment (COLAs) in 2024 to help recipients keep up with inflation.
In the absence of such protection, benefits would quickly lose buying power as prices rose across the economy. For instance, what $100 could purchase in September 2013 would have cost $131 in September 2023, according to the Bureau of Labor Statistics. Annual COLAs keep Social Security payouts in lockstep with inflation.
As mentioned, a 3.2% COLA will be applied to benefits in 2024. That means the average retired-worker benefit will increase from $1,848 per month to $1,907 per month, representing an additional $59 per month (or $708 for the full year), according to the Social Security Administration.
2. Some workers will have more income withheld for Social Security payroll taxes
According to Nationwide, 74% of survey participants incorrectly agreed with the following statement: "Workers pay Social Security taxes on all of their income." If that misconception is consistent among the broader population, some working Americans will be surprised to see more Federal Insurance Contribution Act (FICA) taxes deducted from their paychecks next year.
Taxes under FICA include a 6.2% Social Security tax and a 1.45% Medicare tax. However, while the 1.45% Medicare tax is applied to all income -- in fact, individuals with income exceeding $200,000 pay an additional 0.9% in Medicare tax -- the 6.2% Social Security tax is capped under current law.
Social Security's maximum taxable earnings limit is $160,200 in 2023, meaning the largest tax bill is currently $9,932.40 (i.e., $160,200 multiplied by 6.2%). But the maximum taxable earnings limit will increase to $168,600 in 2024, meaning the largest tax bill will be $10,453.20 next year, an increase of $520.80.
3. Social Security's full retirement age will stay on its upward track
According to MassMutual, 47% of survey participants incorrectly agreed with the following statement: "Under current Social Security law, full retirement age is 65 no matter when you were born." If that statistic speaks for the broader population, many Americans will be surprised to learn full retirement age (FRA) will increase by two months next year for many of those reaching it in 2024 versus 2023.
Specifically, workers born in 1958 will reach FRA in 2024 when they are 66 years and 8 months old, which is two months older than the FRA for workers born in 1957. That pattern will continue until 2027, when workers born in 1960 reach FRA at age 67, as shown in the chart below:
Chart by The Motley Fool.
So what? FRA is the age at which a worker is entitled to their full retirement benefit, also known as the primary insurance amount (PIA). Starting Social Security before your FRA results in a permanent benefit reduction, meaning beneficiaries receive less than 100% of their PIA. Starting Social Security after hitting your FRA results in a permanent benefit increase, meaning beneficiaries receive more than 100% of their PIA.
Americans tend to be confused on that last point as well. According to MassMutual, 51% of adults nearing retirement incorrectly agreed with the following statement: "If I delay taking Social Security benefits past the age of 70, I will continue to get delayed retirement credit increases each year I wait." But delayed retirement credits stop accumulating at age 70, so it never makes sense to wait any longer.
