A recent survey from Nationwide Retirement Institute suggests that most Americans will be caught off guard by these big changes to the Social Security program next year.
In October, the Social Security Administration will issue a press release detailing major changes to the Social Security program in 2024. A similar announcement is made around the same time each year, because certain aspects of the program are adjusted annually to account for changes in wages and inflation.
Even so, a recent survey from Nationwide Retirement Institute suggests that many Americans could be blindsided by some of the revisions. The survey included 1,806 adults from across four generations, and the implied knowledge gaps, assuming they hold for the general population, are somewhat concerning given the important role Social Security plays in later life.
Here are two big Social Security changes that might surprise most Americans next year.
Social Security benefits will get a cost-of-living adjustment (COLA)
One of the largest knowledge gaps identified by the Nationwide report was the relationship between Social Security benefits and inflation. Among survey participants, 70% incorrectly agreed with the following statement: “Social Security is not protected against inflation.”
Fortunately, Social Security payments get an annual cost-of-living adjustment (COLA) to fend off the effects of rising prices. Benefits would quickly lose buying power without that assurance. For instance, the average price of bread has increased 35% in the last decade, while the average price of milk has increased 17% during the same period, according to the Labor Department.
Annual COLAs are based on inflation data from the third quarter, which runs from July through September, so the numbers needed to calculate the 2024 cost-of-living increase are not yet available. However, policy analyst Mary Johnson of The Senior Citizens League says Social Security benefits are on track to get a 3% COLA next year. That forecast has been echoed by economist Preston Caldwell at Morningstar and several other Social Security experts.
What does a 3% COLA mean? The average monthly retired-worker benefit was $1,838.58 in July 2023. A 3% COLA would raise that figure to $1,893.74 in January 2024, meaning the average retired-worker benefit would increase by $55.16 per month, or $661.92 for the year.
The Social Security Administration (SSA) will probably issue its press release detailing the official 2024 COLA shortly after the Labor Department publishes September inflation data on Oct. 12.
Some workers will owe Social Security taxes on more income
The largest knowledge gap identified by the Nationwide report involves the portion of income subject to Social Security payroll tax. Some 74% of surveyed adults incorrectly agreed with the following statement: “Workers pay Social Security taxes on all of their income.”
The income subject to Social Security taxes is actually capped under current law, though many politicians (including President Joe Biden) want to change that because workers with earnings exceeding the income cap are effectively taxed at a lower rate.
Currently, the maximum taxable earnings limit is $160,200. But the income cap is tied to the national average wage index, so it tends to increase from one year to the next. The chart below shows how the maximum taxable earnings limit has changed over the last five years.
|YEAR||MAXIMUM TAXABLE EARNINGS LIMIT|
The October press release from the SSA will provide the specific maximum taxable earnings limit for 2024, but the Board of Trustees believes the income cap will reach $167,700.
In that scenario, some workers will owe Social Security taxes on an additional $7,500 in earnings next year. Most workers are taxed at 6.2%, which implies an additional $465 in taxes for workers with earnings that exceed the income limit.
Self-employed workers are the exception. They are taxed at 12.4%, which implies an additional $930 in taxes for self-employed workers with earnings that exceed the income limit.