Social Security benefits change every year, and it’s important to keep track of anything that will affect your financial plan. High inflation triggered major adjustments in 2023, which might have caught some retirees by surprise.
The changes won’t be as extreme this year, but there are still some meaningful updates to Social Security that seniors should take into account while setting their 2024 budgets.
1. Benefits will increase
The Social Security Administration (SSA) adjusts benefits each year to keep up with the rising cost of living. The SSA bases the adjustment on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which is a popular inflation measurement that’s tracked by the Bureau of Labor Statistics.
Without the cost-of-living adjustment (COLA), retirees’ benefits would slowly lose buying power as prices for basic goods march higher over time. Inflation for basic consumer products has slowly averaged 2% to 3% per year, though it’s turned into a more serious issue over the past few years as inflation spiked higher. The COLA is an important provision that helps keep many seniors above the poverty line.
Thanks to the adjustment, Social Security benefits are going to be 3.2% higher in 2024. That marks a big step down from last year’s 8.7% increase, but the rate of inflation has cooled thanks in part to the Federal Reserve’s interest rate hikes.
This will put extra cash in the hands of more than 70 million Americans. That 3.2% translates to an extra $48 each month for people receiving the average retirement benefit and nearly $150 per month for those claiming the maximum Social Security benefit.
This isn’t likely to meaningfully affect beneficiaries’ purchasing power because the COLA is pegged to consumer price increases. It mostly preserves benefits’ value. However, people have different consumption patterns, so the change could be a net positive or negative from household to household.
2. Earnings limitations are changing
Some people receive Social Security benefits even though they are still working. Employee wages are subject to a retirement earnings test (RET), which exempts a certain amount of earned income as well as unearned retirement income from pensions, annuities, retirement account distributions, interest, dividends, and capital gains, among others.
Recipients who are younger than full retirement age (FRA) can see their benefits limited if they exceed a threshold for earned income. FRA is the age at which you are eligible to receive unreduced retirement benefits from the program. That age is 67 for people born after 1960, but it can be up to a year lower for people born earlier.
People who are below FRA have a cap on the amount they can earn before their benefits are trimmed. If you will not attain FRA at any point in 2024, then your benefits will be reduced by $1 for every $2 that you earn above $22,320 annually. That threshold was $21,240 last year. The number is higher for people who will reach FRA during 2024. In that case, the cap is $59,520, up from $56,520 last year. There’s no such limitation on people who reached FRA before 2024.
It’s important to note that any benefit reduction is a withholding rather than an elimination. Withheld benefits due to the RET will be added to a recipient’s Social Security income after FRA is reached.
3. Medicare premiums will offset COLA
This is relevant for people enrolled in Medicare Part B, which is optional coverage for doctor visits, outpatient care, and other medical costs that aren’t covered by Part A. Most people don’t pay any premium for Part A coverage, but most Part B enrollees must pay at least part of their premium. The standard monthly premium is rising to $174.70 in 2024, up from $164.90 last year.
Most people’s monthly bill for Part B is automatically deducted from their Social Security benefit. That’s going to offset the COLA increase for many recipients, reducing their monthly cash flow.
