What's New with Social Security? 7 Topics to Watch in 2024

Are you ready for the changes to Social Security and Medicare for 2024?

Every year, the Social Security Administration announces changes to Social Security benefits as well as changes to Medicare premiums for the following year. In this article, we are going behind the scenes to help you understand how these changes are determined, as well as some other key Social Security topics that you need to be aware of.

Here are the seven topics we will discuss:

1. 2024 cost-of-living adjustment
2. 2024 Earnings Test
3. Social Security taxes (payroll taxes and benefit taxes)
4. 2024 Medicare premiums
5. 2024 Medicare dates to watch 
6. Status of the Social Security Trust Fund and proposals for reform
7. Update on Social Security claiming strategies

1. The Cost-of-Living Adjustment, or COLA

So, let’s start with the cost-of-living adjustment or COLA. In October of every year, the Social Security Administration announces a bunch of numbers that are determined by the rate of inflation over the prior 12 months. The most eagerly awaited is the cost-of-living adjustment or the amount by which your Social Security check is going to be raised in the following year. Another number is the earnings test threshold, and then, finally, the maximum amount of earnings on which Social Security taxes can be assessed. These are all affected by the numbers we're going to talk about.

The cost-of-living adjustment for 2024 is 3.2%. This means that if your current benefit is $800, you're getting an extra $26 a month. The higher your benefit, the higher your cost of living is in terms of real dollars. If your benefit is $4,000, which could happen if you’re a maximum earner and you waited until age 70 to file, you could be getting a cost-of-living adjustment of $128 a month.

This latest 3.2% cost-of-living adjustment pales in comparison to the year before last, which was 8.7%, and the year before that it was 5.9%. But since 1989, the cost-of-living adjustment has averaged about 2.6% per year, and the Social Security trustees project a 2.4% cost-of-living adjustment going forward. When you hear about concerns with the long-term viability of the Social Security system and the possibility of it going dry, it’s based on some of these assumptions. The Social Security trustees use a projected 2.4% cost-of-living adjustment going forward.

The annual COLA is on the Consumer Price Index for all urban wage earners, which measures the change in the costs of a basket of goods and services that a typical urban worker might buy. It's going to include items like food, transportation, housing, entertainment, healthcare, and pretty much everything people might spend money on. The cost-of-living adjustment is announced each year in October and takes effect with the Social Security checks you receive the following January. Even if you haven't started receiving Social Security yet — let's say you're delaying disbursements until age 70, or you're just trying to delay your benefit for as long as you can so you get a higher amount — your benefit will be raised by the cost-of-living adjustment, so when you do claim your benefit, it’s going to reflect the prior year’s adjustments. 

If you’re interested in learning more about how the COLA is calculated, you can go to www.ssa.gov/oact/cola/latestCOLA.html to see how all these numbers come together to determine what the annual cost-of-living adjustment is going to be.

2. The Earnings Test

So, the COLA is the first big number to be aware of.  Next is the Earnings Test. The Earnings Test applies to you if you’re working and receiving Social Security benefits when you’re still younger than full retirement age. Let’s say you filed early, at age 62 or 63; you’re limited in terms of how much you can earn before it impacts your benefit. The earnings test threshold is also affected by the cost-of-living adjustment, and as you probably know, if you’re under full retirement age and you work and receive Social Security benefits, part of your benefit may be withheld: they’re going to withhold $1 for every $2 that you earned over this threshold, which went up to $22,320 in 2024, up from $21,240 in 20233. If you earn less than $22,320, none of your benefits are going to be withheld. But trying to earn less money is not a formula for building wealth. If you’re under full retirement age and you have the opportunity and the ability to work, it’s probably better to earn as much as you can and delay filing for benefits. 

The new threshold for the year you reached full retirement age is now $59,520, up from $56,520 in 2023. The higher threshold comes into play if you were receiving Social Security last year and you turned your full retirement age in 2024. In the months leading up to your full retirement age, $1 in benefits will be withheld for every $3 you earn over that $59,520. Keep in mind that once you reach your full retirement age, no benefits will be withheld, no matter how much you earn. 

While we’re on the earnings test, what about the monthly earnings test that comes into play the first year that you apply for Social Security benefits? Let’s say you’re under full retirement age, and you file for Social Security that year but continue to work. If you earn more than $1,860 in any one month, your benefit is going to be withheld for that particular month. The next year, you’ll be subject to the annual earnings test; $22,320 adjusted for next year’s cost of living increase. 

Generally, our recommendation is to wait until you stop working to apply for Social Security so you don't have to deal with the earnings test, but we know there will be exceptions for different people for different reasons.

3. Payroll Taxes in 2024

Having discussed the cost-of-living-adjustment and the earnings test, I want to take some time to talk about payroll taxes related to Social Security. The maximum earnings subject to Social Security tax went up from $160,200 in 2023 to $168,600 in 2024. This means that higher earners will pay Social Security taxes on more of their earnings. 

Remember that Social Security taxes represent a form of inflation-adjusted income that lasts for the rest of your life. Whatever your feelings are about the Social Security system and how it works, it’s a guaranteed source of income that you can't outlive. The more earnings you have, the more Social Security taxes you pay, and the higher your benefit will ultimately be. Remember, as long as you're working and paying into Social Security, your benefit will continue to be adjusted. If you improve your earnings record, your benefits may go up, even if you've already started collecting benefits. 

If you're interested in seeing how the Social Security Administration calculates the earnings cap, you can go to www.ssa.gov/oact/cola/cbbdet.html. 

Keep in mind that the Social Security tax rate did not change. As an employee, you're going to pay 6.2% in payroll taxes on your earnings and your employer will pay the same amount. If you're self-employed, you'll pay both parts, which totals 12.4%. The Medicare tax also did not change: the employee's portion of Medicare is 1.45% of all earnings. The Medicare portion does not have an income cap. It's on every dollar you earn, where Social Security is limited, and self-employed people will pay both sides of Medicare as well, so a total of 2.9% for self-employed individuals. 

Here's a little bit of math. If you earn a maximum of $168,600 in 2024, you'll pay $10,453.20 in Social Security taxes. If you're self-employed, you'll pay both the employee and the employer share of that tax for a total of $20,906.40. And, of course, Medicare tax will be on top of that. That takes care of payroll taxes or the taxes that'll be collected to fund Social Security and Medicare.

3b. Taxation of Social Security Benefits

Now, let's get the taxes on your actual benefits, which are going to be a bit different than payroll taxes that are paid if you are employed. Since 1984, Social Security benefits have been subject to some level of taxation depending on your other income. The taxation of Social Security benefits is based on various income levels. In this case, income means what we call provisional income. Provisional income is going to include adjusted gross income plus one-half of your Social Security benefits plus any tax-exempt interest. So, provisional income includes interest on tax-exempt bonds, tax-exempt money markets, and similar Federally tax-free interest. This interest actually gets added back in when determining provisional income. 

If your provisional income is under $32,000 for a married couple, no benefits would be subject to tax. If your provisional income is between $32,000 and $44,000, up to 50% of a married couple's benefits will be subject to tax, and if your provisional income is over $44,000, up to 85% of your benefits are subject to tax. The threshold for a single individual is $25,000 to $34,000. In the case of married filing separately and living with a spouse, 85% of your Social Security benefit is taxable, regardless of income level. 

Note that these income thresholds were never adjusted for inflation. So, more and more people are having to pay income taxes on their Social Security benefits. The important thing to remember here is that up to 85% of your Social Security benefits may be subject to tax, depending on how much other income you have. 

Here, we'll quickly touch on the importance of tax planning and its impact on Social Security decisions. If you’re on Social Security and you have IRAs or 401Ks or similar retirement accounts, it's important to keep in mind that the law recently changed regarding required minimum distributions, or RMDs. You may remember that you used to have to start taking minimum distributions from your IRA accounts starting at 70 1/2. Then, a couple of years ago, the age was raised to 72, and then the most recent legislation raised it to 73 starting in 2024. The thing about RMDs is that you may have had your income and your tax situation all figured out, and then you have to start taking these required minimum distributions from your IRA. If you don't plan ahead, your RMDs can bump you up into a higher tax bracket. In addition to having to pay taxes on the RMDs, RMDs may actually cause you to pay more income tax on your Social Security benefits because your distributions go into the provisional income number. 

Here are a couple of ideas for exerting some control and minimizing the impact:

1. You might want to start drawing down some of those assets so that the RMDs don’t force you into a higher tax bracket for Social Security. The operative word there is might,  as beating the Social Security tax might not be worth it depending on other tax considerations.
2. Roth Conversions: This is another one of those strategies where you really want to talk to a qualified tax professional. A Roth conversion means you are converting pre-tax IRA dollars to Roth IRA dollars, which generate tax-free income. Roth IRA distributions can be a key tax planning strategy. They’re tax-free but don’t get included in provisional income in the way that municipal bonds, municipal or tax-free money markets, and similar "tax-free" accounts like that do. That's a key tax planning aspect, so talk to your tax specialist before you start looking at Roth conversions.
3. The other way to pay less on Social Security tax is to delay your Social Security benefit, which would reduce the number of years that your income tax is subject to income tax on Social Security benefits. This is not the main reason to delay Social Security benefits. It is mostly advantageous because of the higher benefit you get by delaying, but it may also help with taxes.

4. 2024 Medicare Premiums

For 2024 Medicare premiums, the base Part B premium is $174.70, up from $164.90 last year. That base premium is higher, and some people may actually pay even more due to what's called the income-related monthly adjustment amount, or IRMAA, which we'll discuss in a bit. If you're on Social Security and you have your Medicare Part B premium deducted from your Social Security benefit, there's what's called a hold-harmless provision that keeps your check from decreasing if the Social Security cost-of-living adjustment doesn't cover the increase in that Part B premium. This year, the Social Security COLA was 3.2%, so while the Part B premium did go up by 5.9%, in most cases, that dollar amount of the cost-of-living adjustment was more than enough to cover that increase in premiums, so the hold-harmless provision doesn't apply.

The issue that will be affecting more people is the income-related monthly adjustment amount that I touched on a second ago, or what's called IRMAA. This applies to your Medicare premiums. IRMAA is an extra premium you must pay if your modified adjusted gross income (MAGI) exceeds certain thresholds. In 2024, the first threshold is $103,000 if you're a single filer or married filing separately, up from $97,000 in 2023. For married couples, that first threshold is going to be $206,000, up from $194,000. For this purpose, the MAGI is adjusted gross income plus tax-exempt interest. Your premium each year is based on the tax return that you filed two years prior. So, if you're on Medicare, your 2024 premium is based on the income you reported in 2022. If your income has changed due to a specific life-changing event, such as retirement, you may be able to appeal. In other words, if you reported high income in 2022 and have since retired, you can appeal that higher premium. 

One thing I want you to note is that a one-time capital gain is not grounds for appeal. If your 2022 tax return shows high income because you sold an asset in that year, you will have to pay the higher premium in 2024. Again, your 2024 premium is based on your 2022 tax return, and if your income has gone back down in 2023, that means your 2025 premium will be lower. The important takeaway here is to plan ahead.

If you're single and your income is under $103,000, or if you're married and your income is under $206,000, you'll pay the regular Part B premium of $174.70, and there will be no income-related adjustment. If your income falls into these other tiers, you'll pay an income-related adjustment on top of that base premium. For example, if you're in that second tier, you'll pay an extra $68.70 for Part B and $12.90 for Part D on top of the regular premiums. Keep in mind that these are per person, so if you're a married couple, you can double these amounts, and again, planning-wise, you have to make sure you include that in your cash flow projections. Keep in mind that these premiums do not include premiums for any Medicare supplements or Medicare Advantage plans if you happen to be on one of those plans. This is just for basic Medicare.

5. Medicare Dates to Watch

Whether you're on Medicare or you’re getting ready to start, it's also important to be aware of some important dates in 2024. 

The Medicare Advantage disenrollment period is from January 1st to March 31st. During this time, you can get out of a Medicare Advantage plan and go back to original Medicare, but you want to make sure you can get supplemental coverage and get those gaps covered with a Medigap policy. Unless you're applying during what's called your Medigap open enrollment period, which is generally the first six months after enrolling in Part B, the insurance companies don't have to take you. If you have health issues and drop your Medicare Advantage plan, you may not be able to get a Medigap policy, so be sure to get that lined up first if you’re thinking about dropping Medicare Advantage. 

January 1 through March 31 is also the Medicare general enrollment period. This is for people who never signed up for Medicare when they turned 65, or maybe they left their employer plan. If you do sign up for Medicare during this time, your coverage is going to be effective starting July 1.

The annual open enrollment period for people on Medicare is between October 15th and December 7th. In September, you're going to receive information from your current plan about their offerings for the following year. Pay attention to this. Your premiums might go up, your coverage might change, or there might be new plans in your area. If you have a Medicare Advantage plan, you'll want to see how it will change for the following year. If you have original Medicare, you'll want to see how your drug plan will change for the next year, among other things. Then, you'll want to look at other plans offered in your area to see if there's anything that might be better. Make sure you contact that new plan by December 7th. If you do nothing, you'll be re-enrolled in your current plan for another year, and although you'll have another chance to switch Medicare Advantage plans during the disenrollment period discussed previously, it is much more efficient to make your choice during this annual open enrollment period and stay in your new plan for that full calendar year.

6. The Future of Social Security

Let's talk about the future of Social Security. What are we headed for? There's a lot in the news that becomes very politicized, so I want to make sure we talk through what's actually happening. You first have to understand that Social Security was designed as a pay-as-you-go system. Payroll taxes from current workers go into a trust fund and are immediately paid out to current retirees. Because Baby Boomers have been in their peak earning years, the trust fund has accumulated more than is needed for current benefits, and the trust fund holds about $2.8 trillion invested in specially issued treasury securities. But as Baby Boomers continue retiring, these trust fund assets will gradually be drawn down.

Over the next 75 years, we're going to see costs begin to exceed income. There are enough reserves that the system will be able to pay 100% of promised benefits until 2034 at current projections. After that, if nothing is done to reform it, the system income will be sufficient to cover just about 80% of promised benefits. When we get that question, I say, ‘If you're really concerned, if you're doing some projections and retirement planning to retire in the next 10 to 15 years, just plan on about 80% of what your Social Security benefit statement is showing you.’ At this point, that's the worst-case scenario. 

Now, what about some potential solutions? Though the Social Security system is not in imminent danger, most people agree that the earlier that reforms are instituted, the less painful they're going to be for everyone. It really just becomes a math problem that involves an increase in revenues, a cut in benefits, or some combination of the two. 

Here are just a few of the ideas being proposed:

1. The first thing is to consider increasing the maximum earnings subject to Social Security tax. Currently, up to $168,600 in earnings is subject to 6.2% tax paid by you and your employer, so one way to shore up the system is to raise the earnings cap or maybe even eliminate it altogether, similar to Medicare. 
2. Another reform proposal calls for raising the full retirement age, which is currently 66 for people born between 1943 and 1954 and 67 for people born in 1960 or later. Raising the retirement age makes sense with people living longer, while the argument against it is that most people whose occupations involve physical labor really can't work until age 70. 
3. Another reform proposal would change the benefit formula so that future increases would happen at a slower pace. This would affect the benefits of future retirees. There's also talk about changing the formula for cost-of-living adjustments. This could give retirees smaller benefit increases going forward, although the proposed changes are expected to be minimal.

With so many ways that the Social Security system can be reformed, is Congress likely to address the issue this year? Probably not. Other issues are taking priority, and with the existence of the $2.8 trillion trust fund, benefits are not in immediate danger. Nothing's going to happen tomorrow. The last time that Congress made major changes to the Social Security system was in 1983. The fund was within months of running out of money at that point. Theoretically, Congress has until 2034 before they have to worry about that happening again.

7. Claiming Strategies Update

To finish up, we'll provide an update on Social Security claiming strategies. These may not affect everybody, especially those who have already started their Social Security benefit. 

You may have heard about a strategy called ‘file and suspend.’ Just to refresh, that's where a high-earning spouse files for their benefits and then immediately suspends them. Because they’ve opened their record, the lower-earning spouse can actually start claiming spousal benefits. The Budget Act passed in November of 2015 disallowed certain spousal claiming strategies, and 'file and suspend' was one that was done away with. The last date that file and suspend was available was April 29th, 2016. Unless you placed your suspension before April 29th, 2016, your spouse will not be able to claim a spousal benefit in this way. If you did suspend before the deadline, it becomes a question of making sure your spouse takes their spousal benefit at the optimal time if they haven't already done so. Other than that, it's a question of sitting back and waiting. Your benefit will automatically resume at age 70.

The other strategy, the ‘claim now, claim more later,’ was good while it lasted. It used to be possible to claim a spousal benefit while your own benefit was building delayed credits until age 70, but Congress abolished this strategy in November 2015. Individuals born before 1954 were grandfathered in. All those people have turned 70 and are now taking their own benefit, so there's no one left to implement this particular strategy, but we include it here because we still get a lot of questions about it. 

Although some spousal loopholes have closed, it’s still possible for lower-earning spouses to receive 50% of the higher-earning spouse’s PIA, or primary insured amount, if that lower-earning spouse claims their own benefit. Please note that if the lower-earning spouse is claiming the spousal benefit before her full retirement age, that spousal benefit will be less than 50%. Also, the other spouse must be taking their own benefit, and if the higher-earning spouse's benefit includes delayed credits because they claimed after full retirement age, the spousal benefit will not include those delayed credits. 

Next Steps

Now, let's talk about some reasons you may want to think about a Social Security checkup. This should be done with a knowledgeable financial advisor with experience in retirement income planning and, more specifically, Social Security planning. We’ve found that many people miss out on benefits because they don’t know how to claim them or didn't know they were eligible.

Here are just a few examples:

• When we do Social Security checkups, we look to see whether the lower-earning spouse's benefit is significantly lower than 50% of the higher-earning spouse's benefit. If it is, it suggests that the lower-earning spouse filed first, and then her husband filed for his benefit late. Doing it that way kept her from accessing her husband's benefits. Say the husband’s benefit is $3,000, and the wife's benefit is $1,000. If they never filed for that spousal add-on, they wouldn’t get her benefit up to the $1,500 they’re entitled to.
• Another example is a divorced individual who didn't know she could claim a spousal benefit from her years with her ex-spouse. Not everyone can do this — your own benefit must be less than half of your ex-spouse’s. If you've been working, your own benefit probably exceeds your divorced spouse’s benefit, but it's always good to check. Our Social Security checkups can help divorced people find out if they're getting what they're supposed to be getting. 
• Another example is a divorced person whose ex-spouse has died. Sometimes, ex-spouses don't keep track of each other, but if a person was married for over 10 years to an ex-spouse who has passed away, she may be able to get a survivor benefit from that ex-spouse's earnings record if it is higher than her own benefit. These are not limited to women. The Social Security system is gender-neutral, so a divorced man can claim benefits based on an ex-spouse's work record as well. 

The bottom line is that Social Security is the most widely received source of retirement income.  However, in our opinion, it also remains the most undervalued. Making sure you understand how to optimize your benefits and ensuring you receive every dollar you are entitled to can be critical pieces to a successful retirement. Don't take your Social Security benefits for granted.

Free Resources:

Social Security Quick Reference Guide for 2024
Medicare Enrollment Planning Guide
Health Care Quick Reference Guide for 2024

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