Social Security benefits are a source of guaranteed income for over 71 million Americans. For many beneficiaries, income from Social Security is essential to covering expenses during a decades-long retirement. Fortunately, Social Security benefits do not stagnate on your retirement date. Instead, they increase each year to account for inflation.
The annual rise in Social Security benefits is called the Cost-of-Living Adjustment [COLA] and it is typically announced mid-October before taking effect the following year. The Social Security Administration announced the 2024 COLA on October 12th. According to Kilolo Kijakazi, Acting Commissioner of Social Security, the higher benefits “will help millions of people keep up with expenses” in 2024.
The 2024 Social Security COLA
With the 2024 COLA, Social Security benefits will increase by 3.2% for both retirees and those collecting Supplemental Security Income [SSI]. The latest COLA is far lower than the 2023 increase of 8.7% but it is well above the 10-year average of 2.6% per year.
The latest COLA will bring the average Social Security monthly benefit from $1,848 to $1,907 – a $59 increase. Additionally, the cap on Social Security benefits for high earners will rise. For a worker retiring at Full Retirement Age [FRA], the maximum monthly benefit will be $3,822 in 2024 – up from $3,627 in 2023.
How is the Annual COLA determined?
For the first decades of the Social Security program, benefits were only increased when Congress enacted special legislation. This setup meant that the purchasing power of Social Security benefits was eroded by inflation in years that Congress didn’t raise the benefit amount. Fortunately, Congress introduced an automatic annual adjustment beginning in 1975.
Since the enactment of automatic COLAs, the annual increase has been calculated using the change in the Consumer Price Index for Urban Wage Earners and Clerical Workers [CPI-W]. This index measures the change in costs for goods and services, weighted based on the spending patterns of workers living in urban areas. CPI-W is weighted differently than the more commonly referenced Consumer Price Index for All Urban Consumers [CPI-U]. For this reason, the COLA may not perfectly match the inflation reports you’ve seen in the media.
The annual COLA is determined based on the change in CPI-W from the third quarter of the previous year through the third quarter of the current year. Therefore, the 2024 COLA represents the change in prices from Q3 2022 through Q3 2023.
When does the 2024 COLA take effect?
Those who are currently receiving Social Security will see their monthly benefit increase in January 2024 to reflect the COLA. SSI beneficiaries will see the increase slightly earlier, beginning on December 29, 2023.
Retirees delaying Social Security benefits past their FRA won’t miss out on the COLA. The annual increase takes effect each year that you are eligible for Social Security benefits, even if you are not currently receiving them. Therefore, you will realize the cumulative effects of COLAs when you begin receiving benefits.
Other Important 2024 Social Security Information
The inflation adjustment doesn’t just impact Social Security benefit amounts. It also impacts the thresholds for the earnings test and Social Security taxes.
Earnings Test Thresholds Raised
The Earnings Test is a special rule that applies to all people receiving Social Security benefits prior to their FRA who continue to work. If this rule applies to you, a portion of your benefits will be withheld each year based on the amount of income you earn over the applicable thresholds. Once you reach FRA, the withheld amount is paid back to you over the course of your life.
If you will not reach FRA in 2024, $1 will be withheld for every $2 you earn over the annual threshold of $22,320 – increased from $21,240 in 2023. On the other hand, if you will reach FRA in 2024, $1 will be withheld for every $3 you earn over $59,520 – up from $56,520 in 2023.
Social Security Taxable Earnings Increased
The annual tax rates for Social Security and Medicare remain at 7.65% for employees and 15.30% for self-employed individuals. However, some workers could owe more in taxes for these programs because the maximum amount of earnings subject to the tax was increased from $160,200 to $168,600.
If you are currently receiving Social Security benefits, the 2024 COLA will provide a welcome reprieve from rising prices. To see how much your benefits will increase, log on to your My Social Security account in December or wait to receive a letter by mail detailing your benefits for the upcoming year. If you have questions about your Social Security benefits, or want to discuss how to maximize your retirement income, an experienced financial advisor can help.
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