In 2024, many things about Social Security will change. Retirees will get a 3.2% cost of living adjustment (COLA) that increases their checks. Higher earners will also be subject to more Social Security taxes, as there's been an increase in the amount of wages subject to these taxes. The amount that retirees under full retirement age can earn from work before they start to lose some of their benefits is also increasing.
All of these changes are important ones, and will alter the money that retirees and workers have coming in. But there's one thing that won't change -- and it could hurt many retirees.
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This important number is not indexed to inflation, so it doesn't change
The changes mentioned above that will affect Social Security in 2024 aren't happening because of any government action. They happen automatically. And there's a very good reason for that.
Inflation, or the increase in costs of goods and services, occurs over time. Wage growth also occurs, increasing the income most people make. As these changes happen, Social Security benefits have to increase, as do work limits and the amount of income subject to Social Security taxes. Otherwise, the program would cease to function as it should, since seniors would lose buying power dramatically over time.
In order to account for inflation, COLAs, wage base limits, and many other aspects of Social Security change automatically based on wage and price indexes. What does not change, though, is the threshold at which Social Security retirement benefits become subject to taxation.
In fact, since taxes on retirement benefits were first introduced in a 1983 reform bill, the threshold at which taxes become due hasn't been increased. The 1983 legislation put in place a rule that up to 50% of Social Security benefits would be taxable once combined income reached $25,000 for single filers or $32,000 for married joint filers. Then, in 1993, another bill made up to 85% of benefits taxable for single filers with combined income above $34,000 or above $44,000 for married joint filers.
Next year, in 2024, those thresholds remain exactly the same as they did decades ago -- and they aren't changing. While they do refer to combined income (which is half of all Social Security benefits, plus all taxable and some non-taxable income), they're now very low limits, especially since originally only wealthy people were supposed to pay taxes on their benefits.
The reality is, because these numbers don't change even as people's income naturally goes up due to wage growth, more retirees every year end up getting hit with taxes on their benefits. That happens despite the fact that retirees having "higher" incomes doesn't really mean their buying power has gone up, since prices have increased right along with their earnings.
Retirees need to be prepared for taxes on benefits
As long as the thresholds at which Social Security benefits become taxable remain unchanged -- which will be the case indefinitely unless Congress acts to change the law -- more seniors will find themselves losing part of their Social Security every year.
Many non-wealthy seniors end up forced to give a growing share of their benefits to Uncle Sam. If you're planning for retirement, you need to plan for this hit to your benefits, and ensure you have enough savings to support yourself.
