Social Security benefits are getting another sizeable bump next year. Unfortunately, it won't be as big as the jumbo-sized increases of the 2023 and 2022, but with inflation rates having slowed from the historically high levels of years past, next year's boost should still take some of the sting out of grocery and gas purchases.
"Social Security benefits generally do keep up with inflation, though there is a lag," says Rob Williams, managing director for financial planning, retirement income and wealth management at the Schwab Center for Financial Research. "At the same time, the average retiree's expenses generally shrink over time, which can complement those higher benefits."
Here, we'll look at how these increases work and what that mean for taxes and other issues.
The Social Security Administration (SSA) will increase monthly benefits by 3.2% for 2024 to restore some of retirees' spending power as inflation is still running on the high side. That's a big step down after benefits rose 8.7% for 2023 and 5.9% for 2022, but it's still above the average 2.6% increase over the past 20 years.
As a result, the average monthly benefit for a retired worker will increase by about $59 a month, or $700 a year, though the actual amount will vary depending on your 2023 benefit.
The first payments at this higher level will go out in January 2024.
Some retirees may feel like the coming increase is a case of too-little-too-late after years of high inflation and volatile gas prices, but it's worth recalling that the increase is permanent. If inflation rates continue to ease in the coming months in response to the Federal Reserve's aggressive rate increases, retirees will keep their higher benefits.
How are these increases calculated?
The SSA bases these adjustments on changes in the Bureau of Labor Statistics' Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which tracks urban wage earners' spending on items such as housing, transportation, food and beverages, and medical care. (In short, the calculation looks at the average increase in the CPI-W between the third quarter of the current year and the third quarter of the previous year.)
There's some debate over whether the way urban workers spend their money is an appropriate analog for spending by seniors. The government actually tracks a separate inflation measure for Americans aged 62 and older called CPI-E, which gives more weight to medical care and housing costs, and Congress is considering a bill to make the switch to a more representative index. Some studies have shown that cost-of-living increases using that measure could be slightly larger, but for now CPI-W remains the official source for cost-of-living adjustments.
What about Medicare?
Meanwhile, the standard Medicare Part B premium will rise to $174.70 per month in 2024 from $164.90 this year. Medicare Part B premiums are generally deducted from Social Security benefits, so the larger premium will erode some of next-years benefits bump.
How might this affect taxes?
The government isn't just adjusting Social Security benefits. Income tax brackets will also adjust higher to account for inflation (though, the change there is based on yet another inflation gauge called the chained CPI-U). That should come as some relief to retirees with taxable income or gains from investments who practice tax bracket harvesting and worry the higher benefits could scramble their withdrawal and income plans.
"If anything, these changes are a reminder that retirees' incomes aren't truly fixed," Rob says. "Social Security benefits can change from year to year, and retirees can and should adjust their spending as their situation and the broader economic and financial environment evolve."
Building some flexibility into your retirement plans can help. For example, a couple that had done some advance tax planning and converted a portion of their tax-deferred savings to an after-tax Roth account could draw from those savings tax-free, assuming they met the holding requirements. Careful management of their cash flow after accounting for IRS-mandated required minimum distributions from their tax-deferred accounts could also help them stay below the Social Security tax thresholds.
Social Security can be a complex topic. If you have questions about how inflation and cost-of-living increases might affect your income strategy or taxes, talk with your financial advisor.