Social Security plays an important role in financing retirement for millions of Americans, often in combination with distributions from pensions, IRAs, or 401(k) plans. But Social Security benefits tend to be the biggest and most common source of income for retired workers.
In fact, a recent poll from Gallup found that nearly 60% of retired workers count Social Security as a major source of income, while less than 30% say the same about pensions, IRAs, and 401(k) plans. In that context, it is essential for retirees to stay current on the program.
Read on to learn about three changes to Social Security in 2024.
Image source: Getty Images.
1. Social Security benefits got a cost-of-living adjustment in 2024
In any given year, the most anticipated Social Security change is probably the cost-of-living adjustment (COLA), and that is undoubtedly the case in 2024. Inflation has been particularly fierce in the wake of the pandemic, so much so that 58% of retired workers believe they will have to make spending cuts to keep up with rising prices, according to the 2023 Retirement Confidence Survey.
That survey, which sampled 2,537 adults, about half of whom were still employed, also showed the largest one-year decline in worker confidence since 2008. In other words, more workers lost confidence in their ability to retire comfortably in 2023 than at any point since the Great Recession. And inflation was the reason for that lost confidence.
Fortunately, annual COLAs protect the buying power of Social Security, and benefits got a 3.2% COLA in 2024. That means the average benefit for retired workers will increase by $59 per month this year, according to the Social Security Administration. And the average benefit for spouses of retired workers will increase by $28 per month.
2. Social Security's full retirement age increased in 2024
The Social Security Amendments of 1983 cut spending to prevent the trust fund -- the source of benefits paid to retired workers and other recipients -- from becoming insolvent. One way lawmakers effected those cuts was by gradually raising full retirement age (FRA) from 65 to 67.
The full impact of that overhaul will not be felt until 2027, when workers born in 1960 reach FRA at age 67. But the transition will continue to phase in this year. Specifically, some workers born in 1958 will reach FRA at age 66 and 8 months, assuming they reach that age before year's end, and some workers born in late 1957 will reach FRA at age 66 and 6 months this year.
The following chart shows the relationship between FRA and birth year. It also shows the Social Security benefit as a portion of the primary insurance amount, or PIA, payable to retired workers that claim at the earliest possible age of 62 and the latest sensible age of 70.
Image source: author.
The implications of an increased FRA are threefold. First, compared with workers born in 1957, workers born in 1958 must wait an additional two months before they are entitled to their PIA, which is also called the full Social Security benefit.
Second, workers born in 1958 also have two fewer months to earn delayed retirement credits. For context, claiming Social Security after FRA increases the payout by two-thirds of 1% per month, but credits stop accumulating at age 70. That means workers born in 1958 would receive 126.6% of their PIA at age 70, but workers born in 1957 would receive 128% of their PIA.
Third, workers born in 1958 are also subject to a greater benefit reduction if they start Social Security before FRA. For context, benefits are reduced by five-ninths of 1% per month for up to 36 months, and they are reduced by five-twelfths of 1% per month thereafter. The upshot is that workers born in 1958 would have received 71.7% of their PIA at age 62, but workers born in 1957 would have received 72.5% of their PIA.
3. The retirement earnings test exempt amounts increased in 2024
Workers are entitled to retirement benefits at age 62 even if they aren't retired. However, anyone who claims Social Security before FRA will have a portion of their benefit temporarily withheld if their income exceeds certain levels. The relevant limits are known as the retirement earnings test (RET) exempt amounts.
The lower limit applies to workers who won't reach FRA during the year, and the higher limit applies to workers who will reach FRA during the year. Both RET exempt amounts increased in 2024, as follows:
- The lower limit is $22,320 per year ($1,860 per month): Workers under FRA (those who will not reach FRA in 2024) will have $1 in benefits withheld for every $2 in excess earnings. For instance, a worker who earns $25,320 in 2024 ($3,000 over the limit) will have $1,500 in benefits withheld.
- The higher limit is $59,520 per year ($4,960 per month): Workers under FRA (those who will reach FRA in 2024) will have $1 in benefits withheld for every $3 in excess earnings. For instance, a worker who earns $62,520 in 2024 ($3,000 over the limit) will have $1,000 in benefits withheld.
To be clear, any benefits withheld will be repaid gradually when the worker reaches FRA. The RET exempt amounts no longer matter at that point, meaning workers on Social Security can earn as much supplemental income as they want without repercussions.
