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3 changes in social security that retirees should be aware of in 2024

The need for welfare reform is well documented. The latest Trustees Report indicates that Social Security’s pension trust fund will run out of money by 2033 if Congress does nothing. This could lead to major changes in the near future.

But Social Security rules change a little bit almost every year. And even a small change can have a major impact on the well-being of millions of seniors who rely on their monthly benefits to make ends meet. 2024 is no different.

Here are three Social Security changes that retirees should know about in 2024.

A Social Security card sandwiched between $100 bills.

Image source: Getty Images.

1. The maximum social security benefit has been increased

A select group of Social Security beneficiaries will receive a monthly check for $4,873 this year. That’s an increase from the 2023 maximum benefit of $4,555 per month.

To receive that maximum benefit, you must be 70 years old and have earned above the maximum taxable income level for at least 35 years in your career. That’s something only a small portion of people will do.

There are two things going on to increase the maximum benefit.

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The first is the annual cost of living adjustment. Each year, the Social Security Administration adjusts retirement benefit amounts based on the average increase in inflation in the third quarter of the previous year. The COLA for 2024 was 3.2%.

The second factor has to do with how the SSA calculates your average wages to determine monthly benefits. It takes your 35 highest-income years and adjusts them for inflation, using the average wage index, which tracks how much workers are paid on average each year. However, these inflation adjustments are linked to the index in the year you turn 60. Wages you earn after age 60 or later are not adjusted for inflation.

Younger retirees who consistently earned above the maximum taxable income have a higher average monthly income because a greater share of their wages are adjusted based on more recent payroll data. That directly affects how much their maximum benefit is. The group of 70-year-olds this year therefore has a higher average wage than the group of 70-year-olds last year (which is now 71), and therefore a higher maximum benefit.

2. Retirees who have filed earlier can earn more without affecting their monthly benefits

If you continue to work while receiving early retirement benefits, you can earn more this year before the government withholds some of your benefits.

Beneficiaries under their full retirement age are subject to the pension income test. Under the earnings test, the Social Security Administration will withhold $1 for every $2 you earn above the earnings threshold. There is a higher threshold for the year you reach full retirement age, and the SSA only withholds $1 for every $3 you earn above the threshold. All wages or compensation from a job or self-employment count as income.

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For 2024, the income test thresholds are $22,320 and $59,520. These have increased from $21,240 to $56,520 in 2023.

Although the government withholds some of your benefits if you earn above the threshold, it does not keep them for itself. Instead, she uses the amount withheld to adjust your monthly benefit when you reach full retirement age. For each month of benefits withheld through the retirement income test, your benefit will be adjusted as if you had deferred filing for Social Security by one month.

Once you reach full retirement age, you are no longer subject to the means test, which may increase your monthly benefit back to normal levels.

3. The payroll tax for social security covers more income

In 2024, workers will pay Social Security taxes on their first paycheck of $168,600. That’s 5.3% more than the $160,200 in 2023. That’s significantly higher than this year’s COLA of 3.2%.

Although this will not have direct consequences for most retirees, the indirect impact is important. Social Security retirement benefits are increasingly funded by the taxes paid into the program as the SSA begins to deplete the trust fund. As the taxable wage cap rises, the program should collect more tax revenue.

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Importantly, only a small percentage of workers will earn above the wage cap. The SSA estimates only 6%. But the maximum taxable income number is linked to the average wage index, which reflects average wage growth. So as long as average wage growth continues to outpace inflation, it should result in more tax revenue for the program, which will help maintain the benefits of current retirees.

Social Security still needs major reform to sustain it in the long term, but in the meantime real wage growth will help.

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3 Social Security Changes Retirees Need to Know About in 2024 was originally published by The Motley Fool

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