Social Security COLA increase in 2024 will be 3.2%. Some say it won't cover much.
Retirees and others receiving Social Security benefits will see more financial relief from inflation's surging prices in a few months, thanks to a 3.2% cost-of-living adjustment for 2024.
Getting word of an extra $58 a month or so — which would vary based on how much you're already receiving in Social Security benefits — is certainly welcome news. But the extra money falls short of covering any frills — no one is going to be able to re-create a glamorous date night fashioned after "The Golden Bachelor" here.
And some now worry about the taxes and other higher costs.
Cost-of-living adjustments — which were put into place by Congress in 1973 — are designed to protect the purchasing power of those receiving Social Security and Supplemental Security Income benefits. Those on a fixed income face financial stress when prices keep climbing and their incomes don't.
Make no mistake, sky high inflation means that next year will be the third year in a row for better-than-average inflation adjustments for Social Security benefits.
The U.S. Bureau of Labor Statistics released inflation data for September on Thursday. The CPI rose 3.7% over the last 12 months through September. The rising cost of shelter was the largest contributor to the month-over-month increase of 0.4%.
And the Social Security Administration press office tweeted out that the "2024 COLA is 3.2%" shortly after the CPI news was released — noting that more was to come shortly.
The adjustment will boost Social Security and Supplemental Security Income benefits for more than 71 million Americans, according to a news release issued Thursday morning. On average, the agency noted, Social Security retirement benefits will increase by more than $50 per month starting in January.
More than 66 million Social Security beneficiaries will see the 3.2% cost-of-living adjustment beginning in January. About 7.5 million people receiving SSI will see more money beginning on Dec. 29, 2023. Some people receive both Social Security and SSI benefits.
“Social Security and SSI benefits will increase in 2024, and this will help millions of people keep up with expenses,” said Kilolo Kijakazi, acting commissioner of Social Security, in a statement.
A specific formula is used to calculate the inflation adjustment based on monthly changes for July, August and September for the Consumer Price Index for Urban Wage Earners and Clerical Workers.
In 2022, the cost-of-living adjustment for Social Security benefits was a solid 5.9%.
In 2023, retirees and others saw an 8.7% COLA bump for Social Security benefits, as well as Supplemental Security Income benefits. That was the biggest inflation adjustment since 1981 when the COLA hike was 11.2%.
Mary Johnson, a policy analyst at the Senior Citizens League, a nonpartisan advocacy group, said the COLA hike for 2024 is above the 2.6% average cost-of-living adjustment over the past 20 years. Three years included no adjustment at all or 0% for inflation — 2010, 2011 and 2016.
The round of inflation adjustments, though, comes with its own hidden costs and quirks. And here's a look at why an extra $700 or so a year in 2024 for some retirees is welcome but offers far less than some might imagine:
Low benefits to start
The average monthly benefit for all retired workers was $1,827 in January after the COLA adjustment this year, according to the Social Security Administration. But those who retired several years ago often are looking at lower monthly benefits, based on their incomes during their working years, and they see a smaller boost than $58 a month in 2024.
If you start claiming Social Security retirement benefits at age 62, the benefit you receive each month is smaller than if you claimed at full retirement age. For those born in 1960 or later, the full retirement age is now age 67.
Higher taxes
Many who hold part-time jobs in retirement or had built up retirement savings are paying taxes on a portion of their Social Security benefits. About 40% of people who get Social Security have to pay income taxes on their benefits, according to a report issued by the Social Security Administration in January.
But oddly enough, higher cost-of-living adjustments are expected to drive up the number of those who end up paying taxes on benefits.
Johnson noted that many retirees who have received Social Security benefits for more than three years now say they began paying taxes for a first time on those benefits when they filed their 2022 returns earlier this year — after that 5.9% hike.
After receiving an even higher COLA benefit of 8.7% in 2023, Johnson said, the expectation is that more retirees and others will pay federal income taxes on their Social Security benefits for the first time when they file 2023 tax returns next year. That's because they're more likely to reached the income threshold for when benefits are taxed.
The tax hike is a "real thorn in their side," Johnson said.
"The income thresholds that trigger the tax on a portion of Social Security benefits have never been adjusted for inflation," she said.
The magic number is $25,000 in combined income for singles and $32,000 for couples filing a joint return.
For single filers, the threshold for when you'd have to pay taxes on 50% of Social Security benefits applies when your combined income is between $25,000 and $34,000 a year. After that, up to 85% of benefits is taxable.
Couples filing a joint return could have to pay taxes on 50% of their Social Security benefits if their combined income is between $32,000 and $44,000. If the couple's combined income is higher than that, up to 85% of benefits is taxable.
When calculating your federal income taxes, you're looking for your combined income, which is your adjusted gross income, plus nontaxable interest, such as interest on certain bonds, plus half of your Social Security benefits received that year.
The combined income will take into account any earnings from a job, income from your investments, taxable withdrawals from traditional 401(k) plans, and other taxable income.
COLA adjustments add more money toward your combined income.
Ronald Stokes, a member of the personal financial planning committee for the American Institute of Certified Public Accountants, said one of the worst things that can happen to a retiree is being surprised by a big tax bill that cuts into someone's savings or cash flow.
Retirees don't want to wait until April to get a better understanding on how much they might owe in taxes, given the recent boosts to their Social Security benefits. It's important to pay attention to other events in your life that might drive up your taxable income, too, such as if you sold stock at a gain or took on more hours at a part-time job.
Some people, Stokes said, really follow tax rules very closely when it comes to understanding when their Social Security benefits will be taxed. But others don't worry about it until tax time.
If someone who faces such taxes didn't request to withhold taxes from their Social Security benefits or doesn't make estimated tax payments, he said, they could face some financial challenges when they file their tax returns and see that they owe money. It's essential to communicate with your tax professional during the year before taxes are due to understand what moves might be made to limit the taxes owed.
"The two COLA bumps that we had were fairly sizable," he said. "It definitely can impact taxes because Congress certainly has not relaxed any of the taxable thresholds on Social Security in light of these COLAs."
The Internal Revenue Service often announces later in October the annual inflation adjustments for more than 60 tax provisions. The standard deduction, for example, goes up based on inflation, so do marginal tax rates. But the threshold for taxing Social Security benefits is not adjusted based on inflation.
Social Security benefits began being taxed in 1984 after Congress decided to tax a portion of benefits for the highest-income recipients. In 1993, additional legislation was passed that made up to 85% of benefits taxable for those with higher incomes. Again, that income threshold was never adjusted for inflation.
According to data from The Inflation Calculator online, what would cost $25,000 in 1984 would cost a bit more than $72,000 in 2022. What would cost $32,000 in 1984 — the threshold for couples filing a joint return — would have cost more than $92,000 in 2022. If the threshold were adjusted for inflation, fewer people would be paying taxes on their Social Security benefits.
Johnson said the Senior Citizens League advocates for adjusting those income thresholds to today’s dollars and continuing to do so annually, as is done for other parts of the tax code.
But she acknowledges that there are trade-offs if you make that change. Hundreds of billions of dollars are projected to be raised from the tax from now through 2032 and targeted to be used to fund Social Security and Medicare trust funds. How would that revenue be replaced?
Older adults face different price hikes: The cost-of-living adjustment index used to beef up Social Security benefits can sometimes fall short when it comes to price hikes faced by elderly people.
Since 1975, the Social Security COLA has been calculated annually using the Consumer Price Index for Urban Wage Earners and Clerical Workers or CPI-W, but Johnson noted that index does not fully reflect the costs faced by retired households over the age of 62, who can spend more of their budgets on health care and housing.
In many years, Johnson said, health care and housing tend to rise in cost more quickly than overall inflation. But retirees and others benefited from higher cost-of-living adjustments in other years, such as recently, when energy spiked.
Younger working adults tend to spend more on commuting costs and energy, as reflected in the CPI-W, while spending considerably less on health care than older adults. The Senior Citizens League estimates that Social Security benefits have lost about 36% of buying power since 2000.
The Social Security 2100 Act, introduced in the House by Democratic Rep. John Larson of Connecticut, would revamp the COLA calculation, as well as boost Social Security payroll taxes. The bill also includes adding an additional net investment income tax for taxpayers earning over $400,000.
Under the proposed legislation, the calculation of inflation adjustments for Social Security would use the higher of two indexes, the CPI-W currently used or the CPI-E, a price index that takes into account more of the expenses incurred by those 62 and older.
Medicare costs: Those who are on Medicare will see part of that COLA boost go toward the increase in new Medicare Part B premiums.
The Centers for Medicare & Medicaid Services announced late Thursday that the standard monthly premium for Medicare Part B enrollees will be $174.70 for 2024, an increase of $9.80 from $164.90 in 2023.
Johnson adds that seniors face increases in other health care related costs, too, including seeing premiums for Medicare Advantage plans go up, limiting what else the COLA hike might be able to cover.
Contact personal finance columnist Susan Tompor: stompor@freepress.com. Follow her on Twitter @tompor.
This article originally appeared on Detroit Free Press: Social Security COLA to increase in 2024; CPI data released
