what changes are coming to social security in 2024

what changes are coming to social security in 2024

When Social Security began back in 1935, it was intended to be one leg of someone’s retirement income stool. The other two legs were savings and pensions. Now, that was 90 years ago, and today it is very rare for people to have pensions, so that leg is gone. That leaves savings and Social Security.

Recently, we found out that 70% of all people surveyed said they have less than $115,000 in savings for retirement. So, for many people, that leg is also gone. This means that sometimes people have only one leg in their retirement income, and that is Social Security. So, whenever Social Security makes any changes, it’s going to impact millions and millions of people.

five major changes coming to Social Security for 2024.

Social Security Quarter

This coming year, there is a change to the Social Security quarter. All of us pay into the Social Security tax system, and we accumulate quarters. As long as we have 40 quarters paid into Social Security, we are able to draw benefits. It takes a minimum of 40 quarters. This can be your own 40 quarters or it can come from a spouse you’re married to, an ex-spouse, or even a deceased spouse. But we need 40 quarters to draw Social Security.

What Social Security does every year is establish the quarter amount. Last year, the quarter was $1,640, but in 2024, it’s been adjusted to $1,730. So, as long as we have a net self-employment income or W2 income of $1,730, we earn one quarter. We cannot accumulate more than four quarters in a year, but we don’t have to work the entire year to accumulate those quarters. For example, if someone wants to earn all four quarters in a year, they just need to make $6,920 in reportable net self-employment income or W2 wages, and they’ve accumulated their four quarters. This applies to Medicare and Social Security. The system was designed in 1935 for Social Security and in 1965 for Medicare to help ensure people reach 40 quarters for basic benefits eligibility.

Maximum Taxable Income

The second change involves maximum taxable income. We only pay Social Security taxes up to a certain income limit, whether through self-employment income or W2 wages. In 2023, the limit was $160,200. For employees, 6.20% is paid by the employee and 6.20% is matched by the employer, totaling 12.40%. Self-employed individuals pay the full 12.40%. In 2024, the limit has been raised to $168,600, meaning higher-income individuals will pay Social Security taxes on more of their income. It’s estimated that this affects less than 7% of the population, as most people will fall below that threshold.

Earnings Test

The third change relates to the earnings test, which applies to those who are still working and taking Social Security before full retirement age. Once full retirement age is reached, the earnings test no longer applies, and there’s no impact on Social Security benefits, regardless of income. But if you take Social Security before full retirement age, the benefit can be impacted by the earnings test.

The earnings test only applies to the working wages of the Social Security recipient, not to family income, spouse income, or non-working income like rental, investment, pension, annuities, IRA, or 401(k) distributions. Here’s an example: someone born on 12/25/1958 has a full retirement age of 66 years and 8 months. By 12/25/2024, they will have turned 66, but won’t reach full retirement age until August 2025, as we add 8 months. Prior to reaching full retirement age, their benefits will be subject to the earnings test.

There’s a low earnings test limit and a high earnings test limit. If this person began receiving Social Security in December 2020, the low earnings test applies up until the year before reaching full retirement age. The low earnings test for 2024 is $22,320. If working wages exceed this amount, Social Security will withhold $1 for every $2 over the limit. For instance, if they make $4,000 over the limit, $2,000 will be withheld from their benefits.

Once the individual reaches the year of their full retirement age, the high earnings test applies. In this example, for January through July 2025, the high earnings test limit will be $59,520. If wages exceed this limit, Social Security will withhold $1 for every $3 above the limit. After full retirement age, there’s no earnings test, and no impact on benefits regardless of income.

Have you not yet hit your full retirement age? These are the numbers that you’re going to have to live with, and this will be based on what you’re making. Then that will determine if there’s going to be any reduction in your Social Security benefit or not.

COLA

That brings us then to COLA, the fourth change, which is about the Cost of Living Adjustment. We call these the COLAs, and COLAs happen because this is the government’s way of saying that as prices go up, we want to make sure that people’s Social Security checks are not dwindling away. We don’t want their benefits to be eroded by inflation.

And so we’ve had these Cost of Living Adjustments now for many years. In 2023, actually had the largest one in 40 years, which was 8.7%. Most folks are really, really excited about that. Now, the 24, is not so generous, but again, there’s a formula that determines all this. And so even though we had inflation, our increase for Social Security and those that are receiving SSI benefits, Social Security Disability Benefits, all those are going to get a 3.20% in their checks come January of 2024.

So let’s talk about how this happens because it’s just not random willy-nilly. There is a formula to this, and it’s actually tied to the Consumer Price Index W, which stands for Urban Wage Earners and Clerical Workers. So what happens is every year they look at what this group of consumers are buying, things they are purchasing, and they have what we call baskets of goods and services.

They look at the third quarter of every year, and they looked, of course, 2022, and what they do then is they’re going to compare that to the next quarter, the third quarter in 2023. And so it’s the same basket of goods and services, now we have the third quarter of 2023. And if they take the difference between that, and if this is higher, they take the percentage of the increase of these goods and services, and that becomes then the Cost of Living Adjustment, which again was 3.20%.

They calculate this every year, and for the last 20 years, the average has been 2.6%. So this was a little bit above the average, but I know some are very disappointed because of all the inflation that we’ve been dealing with in our economy.

Will I Still Benefit from COLA?

Now in our business, we get a lot of questions about Social Security, and recently once the Social Security COLA was announced, people were asking, “Well, I’m not yet taking Social Security benefits. Am I going to still benefit from the Cost of Living Adjustment?” And the answer to that is yes, yes, as long as you are eligible for Social Security, which means 62 and above, even though you’re not taking benefits, you will benefit from the Cost of Living Adjustment.

How Social Security Calculates Benefits

What they do first off, they take the top 35 years of earnings—top 35 years. Now if you work 40, again, they’re going to take top 35. If you work 30, they’re going to have five zeros in there because it’s all going to be top 35. And so what they do with the top 35 is they apply an index to those so that that dollar amount then is going to be in real dollars because what you made, you know, 30 years ago in 1993, it would be worth more today. So they want to put that in real dollars, so face value of dollars, and so they’re going to index that up.

And so when they do that, we’re going to have hopefully a fairly large amount here, and they’re going to take that number and they’re going to divide that by 420 months. All right, so let’s just say that someone has made in these 35 years, they’ve made $1.6 million over their lifetime. So this is actually lifetime earnings, the top 35 years indexed up.

Now just so you know about the index, actually, once we hit age above 60—60 plus—if some of those 60 plus years are in that top 35, they do not index those up. They just take those for their base value. Anything prior to that, then it would be indexed up. So my point is we have this lifetime earnings divided by 420, and what that does is that gives us a number that is called the average index monthly earnings.

Now this is not yet what we’re going to get for Social Security, but it is part of the formula. So let’s take that 1.6 million and let’s divide that by 420 months, and that’s going to give us 3,809.52. Let’s keep it simple; let’s just call it 3,809. Okay, there’s 52 cents in there, but we’ll call 3,809 our average index monthly earnings.

So what they do with that then is they take the 3,809 in our example—our AIME—and then what they’re going to do is they’re going to apply that to bend points to actually come up with our Social Security amount.

Applying Bend Points

So these bend points, and I have not memorized these fully for 2024, but I’m pretty sure the first bend point is 1,174. In fact, let me verify that; I don’t want to be wrong. That’s right, 1,174, and the next bend point is 7,078.

So what this means is of the first $1,174 of my AIME, they’re going to give me 90% of that in my Social Security check. So let’s take the 1,174—hang on just one second—1,174, and we get 90% of that, and that would give us 1,056.60.

Then the difference between this second bend point, whatever is between there, then we’re going to get actually 32% of that. So in this example, the difference is 2,635. We get 32% of that, so 32% of that gives us $843.37.

All right, so they’re going to add that to it. Now if I was above 7,078 in my AIME, then for everything above that they actually give us 15% of that. All right, but in my example, these people are not—they’re actually below that—so they’re not going to get anything of the 15%. So they’re only getting applied those first two bend points.

So we take 1,056 plus the 843.37, and that tells us what our amount is, and it’s $1,899.00. This is what they call our primary insurance amount, and what that means is this is what I’m eligible for at my full retirement age, or what some call normal retirement age, which for most people today is going to be somewhere between 66 and 67.

So if I take my benefits at my full retirement age in this example, that’s how much my check would be. Now if I take my benefits prior to my full retirement age—I take as early as 62—then what happens? I’m going to get less than that. It’s actually about a half percent a month. So let’s say I’m 60, full retirement at 67, and I take it 62, I’m going to lose a full 30% of my primary insurance amount.

Now I have the cash, but I’m going to take a 30% reduction, and that is going to be for life, which means the only way my benefit can ever go up once I begin to take benefits of my own is through the Cost of Living Adjustment.

Now if I take it full retirement age, there’s no reduction, but some people decide to take it after, and they actually can delay that until age 70 and grow that account at 8%. So my full retirement age is 67 and I take it 70, I grew that a full 24%. Now when people used to have a full retirement age of 66, they could grow to a full 32%. Can’t do that today, but the point is if we take early, we take less; if we take later, delay that, then we’re going to get more of a check.

And so this is how the benefits are calculated. Now I said earlier, well, what happens to people who are not yet claiming? So what happens is this full retirement age amount then, if you are not yet taking, is going to go up by 3.2%. So they calculate that in, so when they come back and they decide how much your Social Security benefit is going to be, they’re going to follow this formula. But every time there was that Cost of Living Adjustment, it impacted your primary insurance amount. So though you’re not taking, you haven’t claimed yet, you still benefited from that. So this is the formula that’s followed for 2024.

Maximum Social Security Benefit

That brings us then to the fifth and final change for Social Security for this next year, and I want to talk to you about the maximum Social Security benefit. What is that going to be? Now first off, let me remind you that there are very few people that get the maximum benefit, and what this means is this is the maximum benefit for new retirees.

And so when we talk about maximum, this is the most anyone would receive. So you just learned earlier as we went through that formula, this is somebody that maxed out all 35 years. In other words, they hit that maximum cap that’s subject to Social Security taxes every single year, and again, they say less than 7% of all people even do that.

But those numbers are important because they change. The government always publishes these every year. So first off, right now in 2023, if someone would retire this year at 62 and they had maxed out those 35 years, that benefit would be 2,572 a month. Going into 2024, it’s going to be $2,710—a little over 5% increase.

Now if someone goes to full retirement age, which is somewhere between 66 and 67, this year had they maxed out, they would have gotten a check for 3,627. I know very few get this, but they could if they would have maxed out. That’s going to increase into 2024 to $3,823.

Now someone were to delay, not take it for retirement age, and grow that account called delayed retirement credits at 8% a year, and they went to age 70, this year they would have received a check of $4,555. Next year, it’s going to be almost $4,900—4,873.

Again, so this is a number that’s published every year as they make the Cost of Living Adjustments and make these adjustments to make sure people know if they retire at these ages, that’s the maximum that anyone would receive.

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