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A record 8.7% cost-of-living adjustment helped Social Security beneficiaries stave off the effects of inflation in 2023.
But as they file their federal returns this tax season, they may be surprised to find more of their benefit income has been taxed.
Capitol Hill lawmakers on both sides of the aisle have put forth proposals to eliminate those levies on benefit income altogether.
Rep. Angie Craig of Minnesota, who is championing a bill with fellow Democrats, calls the idea a “win-win.”
“It’s a tax cut for seniors and a way to ensure more Americans can depend on the Social Security benefits they’ve earned,” Craig said in a statement.
But experts say eliminating taxes on Social Security benefit income may be a tough ask as the program faces a funding shortfall.
The 8.7% cost-of-living adjustment, or COLA, for 2023 — prompted by record high inflation — was the biggest annual increase in four decades. The Social Security Administration estimated it would put an extra $140 per month on average in beneficiaries’ monthly checks.
The year before — 2022 — the cost-of-living adjustment was 5.9%.
Both increases were substantially higher than the 2.6% average annual increase to benefits over the past 20 years due to record high increases in prices.
As inflation has started to subside, a 3.2% cost-of-living adjustment for 2024 has come closer to that average.
But even as recent annual adjustments spiked, the thresholds at which Social Security benefits are taxed have stayed the same.
Up to 85% of Social Security benefit income may be taxed.
The levies are applied to combined income, or the sum of half your benefits and total adjusted gross income and nontaxable interest.
If your combined income as an individual tax filer is between $25,000 and $34,000 — or between $32,000 and $44,000 if married and filing jointly — you may pay taxes on up to 50% of your benefits.
If your combined income is more than $34,000 and you file individually — or if you’re married and file jointly and have more than $44,000 in combined income — up to 85% of your benefits may be taxed.
This year, some Social Security beneficiaries may see their benefits taxed for the first time, according to the Senior Citizens League. A 2023 survey from the nonpartisan senior group found 23% of respondents who had been receiving Social Security for three or more years paid taxes on their benefits for the first time that year.
That share may increase this tax season following the 8.7% cost-of-living increase in 2023, according to the group.
But just how much more beneficiaries will pay in taxes due to the “unusually large COLA” for 2023 depends on their personal circumstances, said Tim Steffen, a certified financial planner and the director of advanced planning at Baird.
“Whenever income is up, it’s reasonable to expect your tax liability to be as well, although that really depends on other income and deductions [you] might have between last year and this year, too,” Steffen said.
Over time, because Social Security’s combined income thresholds don’t change, more beneficiaries can expect to pay taxes on the money from their monthly checks.
“At a certain point in the future, essentially everyone will be paying taxes on their Social Security benefits,” said Emerson Sprick, associate director of economic policy at the Bipartisan Policy Center.
Some lawmakers have decried a so-called “double tax” that those levies on benefits impose after beneficiaries paid into the system through payroll taxes.
“This is simply a way for Congress to obtain more revenue for the federal government at the expense of seniors who have already paid into Social Security,” Rep. Thomas Massie, R-Ky., who is sponsoring the Republican bill, said in a statement.
While both sides of the aisle have proposals to eliminate taxes on Social Security benefits, they differ on how to pay for it.
Craig’s proposal — called the You Earned It, You Keep It Act — would pay for the change with transfers from Treasury general funds and applying the Social Security payroll taxes to earnings over $250,000. Currently in 2024, the first $168,600 in employee wages is subject to the Social Security payroll tax.
The bill, which has seven Democratic co-sponsors, would help increase Social Security’s ability to make benefit payments on time and in full by 20 years, according to an analysis by the program’s chief actuary.
Massie’s proposal — called the Senior Citizens Tax Elimination Act — would pay for the cost of eliminating taxes on benefits through government fund transfers outside of the Social Security trust funds. The proposal, with 30 Republican co-sponsors, would not include any tax increases.
The idea of nixing taxes on Social Security benefits will likely be popular with the retirees who pay them. More than half of seniors — 58% — said the income thresholds for taxes on Social Security benefits should be updated to today’s dollars, according to a Senior Citizens League survey conducted last year.
But it may be tougher to get the change passed by lawmakers.
“They’re really popular messaging bills,” Sprick said. “But that doesn’t translate to a high probability of legislative success.”
Authorizing general fund transfers to shore up Social Security is “deeply unpopular” in Congress, Sprick said.
Social Security’s tax policies are already progressive, with just around 40% of beneficiaries owing levies on their benefit income, he noted.
Because of that, other changes to help the bottom 60% who do not owe taxes — such as providing higher income replacement for lower earners or a guaranteed level of minimum benefits — may better help those retirees, Sprick suggested.
For years now, rumors have been flying that Social Security is on the verge of going away. But thankfully, those rumors are bogus.
Social Security is not in danger of disappearing completely for one giant reason — its primary source of funding is payroll tax revenue. And as long as workers continue to get taxed on their earnings to fund the program, Social Security can continue to exist.
That doesn’t mean that Social Security will be able to afford to keep up with scheduled benefits, though. In the coming years, the program is expected to owe more to retired and retiring seniors than what it collects via labor force contributions. And while Social Security can tap its trust funds to keep up with scheduled benefits for a while, in time, those funds are apt to run dry.
Image source: Getty Images.
In fact, recent projections have Social Security’s trust funds running out of money in 2034 — just 10 years from now. So lawmakers have limited time to come up with a solution to prevent those cuts from happening. That’s why it’s a good idea to come up with a plan for dealing with those cuts — whether you’re currently receiving Social Security or are still working.
Social Security cuts aren’t guaranteed to happen. But the fact that lawmakers have yet to arrive at a preventive solution doesn’t bode so well. So it’s a good idea to figure out how you’ll cope with less money from Social Security should that situation come to be.
If you’re already retired, one option to look at may be going back to work. Earnings from a part-time job could replace the portion of your monthly Social Security check that’s at risk of going missing.
Another option is to downsize your home, and possibly your lifestyle. If you’re able to sell a larger home and buy a replacement one at half the cost, you can pocket the difference and use it as income. Plus, downsizing might mean spending a lot less on expenses like property taxes and maintenance. Along these lines, cooking more at home versus dining out frequently could help you conserve cash.
You can also look to move to a part of the country where living costs are generally lower. Just be mindful of the fact that certain states tax Social Security benefits.
Meanwhile, if you’re still working, your best course of action for dealing with Social Security cuts is to save, save, and save some more. The larger a nest egg you manage to bring with you into retirement, the less likely you’ll be to struggle financially on a smaller Social Security benefit.
In fact, let’s say you’re 35 years old with $15,000 in savings to date. If you contribute $500 a month to your retirement plan over the next 30 years, and your portfolio delivers an 8% average annual return, which is a bit below the stock market’s average, you’ll end up with over $830,000.
Social Security has been bailed out by lawmakers before in the context of potential cuts, so that may very well happen again this time around. But your best bet is to put a plan in place in case you end up with less money from the program than expected down the line.
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It looks like we had better ramp up our 401(k) and IRA contributions to the absolute max while we still can, folks.
That means a full $30,000 this year, and more if you’re 50 or older: The 401(k) maximum for 2024 is $23,000 and the IRA maximum is $7,000, and savers who are 50 or older can make additional contributions. It may also mean converting your traditional pretax IRA to a post-tax Roth IRA in order to maximize the after-tax amount in your shelters.
The reason? There is talk in policy circles of getting rid of these plans entirely — or at least ending the tax breaks, which pretty much amounts to the same thing. That would be a political shock and a financial earthquake, especially for the middle class.
Policy wonks argue that these accounts mainly benefit very high earners while doing little to increase savings. They want to use those extra taxes to bail out Social Security, which is hurtling toward a crisis.
Allison Shrager of the Manhattan Institute has just written about this idea. Boston College’s Center for Retirement Studies wrote about it last month. University of Virginia law professor Michael Doran helped get the ball rolling a few years ago, calling these middle-class tax shelters a “fraud” that mainly benefit the rich.
At the moment nobody is talking about anything retroactive: They wouldn’t start imposing taxes on money that’s already been contributed into these accounts. Rather, the idea would be to end the tax deductions in the future, replacing them with some other system that doesn’t feature the same deductions.
How serious is this? Nobody knows. At the moment it’s just talk. But Social Security is in crisis. Eventually they’ll either have to cut benefits or raise taxes.
The argument against 401(k) plans and IRAs is that they are regressive: They benefit high earners the most. That isn’t entirely false. Clearly, if someone pays a higher tax rate, they will get more benefit from a tax deduction. If you contribute the maximum $23,000 to a 401(k) plan and you are in the top federal tax bracket of 37%, you will shave $8,500 off this year’s tax bill. If you’re in the 15% federal tax bracket, you will save less than $3,500.
But there are multiple issues with this line of argument.
As MarketWatch’s Robert Powell pointed out when this idea first popped up a while back, these accounts don’t let people avoid taxes altogether. They just defer them. So reports of the regressive nature of the tax break may be exaggerated.
And, yes, tax shelters help the rich, but they also help the middle class — who often really need them. These plans can make a real difference to families trying to save for their retirement while making ends meet and also, for example, saving for their kids’ college education. Torpedoing a lifeboat used by the middle class on the grounds that it might also be carrying some rich people seems very 1917.
Meanwhile, high earners get a bigger tax deduction on their contributions only because … er … they pay more taxes in the first place. Obvious, but worth repeating.
It’s also not entirely clear how regressive these tax shelters really are. If you work all your life at median-income jobs, save aggressively and benefit from luck and a bull market, you may retire with a huge 401(k) balance. Lucky you. But you may end up paying a higher tax rate on the withdrawals than you would have done on the contributions, which means you may not be that much better off at all.
That’s not a complaint, that’s an observation. It’s how the system is supposed to work. It’s progressive. If you end up retired with very little money, on the other hand, you will pay very little tax on your withdrawals.
These tax shelters also have a bunch of important practical benefits for savers. They help people invest in bonds, for safety, as well as stocks, for growth. Bond income and interest income are typically taxed at much higher rates than stock income. Tax shelters leave people free to change and rebalance their portfolios without triggering extra taxes. Incidentally, and this is not nothing, they also free people from some absolutely insane, stupid and largely pointless IRS paperwork every year.
These tax shelters also make simple, intuitive sense. I pay tax on my income, which is money I can use right away. I can’t use my retirement savings for decades. I will only pay tax on that when I withdraw it from the account to spend it.
According to Boston College’s calculations, ending tax-deferred 401(k) plans and IRAs would raise $185 billion a year in extra taxes.
You know what else would raise almost exactly the same amount? Just a small — tiny — tax on the assets of the super-rich.
According to Federal Reserve numbers, the richest 0.1% now own 12.4% of all the wealth in America. Back in the late 1980s, during the era of Ronald Reagan and George H.W. Bush, that group owned 7.6% of the wealth.
Their total assets now stand at $20 trillion. A 1% tax would raise $200 billion without touching the retirement-savings vehicles of the middle class.
Many of these wealthy people, luckily for them, pay very little in taxes, or even none at all. They may not even show up in the IRS tables of “high earners.” You may remember when someone from this group ran for president a decade ago and released his tax returns. Turns out Mitt Romney wasn’t paying a rate of 50% or 37%, but 14%. And many of the really, really, really rich pay even less — or nothing.
The average return on equity, historically, has been about 10%, in nominal terms. So a 1% tax is bupkis.
But such a tax unlikely to happen. It would upset the donor class. Instead, they may come for you and me. As analysts pointed out a decade ago, the rich get what they want out of Washington, time and again. And while people may criticize the American system all they like, it’s still the best one money can buy.
Most married couples have the benefit of not one, but two Social Security checks in retirement. Even if only one spouse worked, the other can claim a spousal benefit that could be worth hundreds to thousands of dollars. The average monthly spousal benefit as of December 2022 was about $889, which would be worth nearly $1,000 per month in 2024.
But your choices play a big role in how much you take home from the program. Below, we’ll talk about how your partner’s benefit and your claiming age determine the size of your checks.
Image source: Getty Images.
A spousal Social Security benefit is based on the worker’s primary insurance amount (PIA). That’s the benefit they qualify for at their full retirement age (FRA), which depends on their birth year. The table below can help you find yours:
|
Birth Year |
Full Retirement Age (FRA) |
|---|---|
|
1943 to 1954 |
66 |
|
1955 |
66 and 2 months |
|
1956 |
66 and 4 months |
|
1957 |
66 and 6 months |
|
1958 |
66 and 8 months |
|
1959 |
66 and 10 months |
|
1960 and later |
67 |
Source: Social Security Administration.
To calculate PIA, the government plugs the worker’s average monthly earnings over their 35 highest-earning years, adjusted for inflation, into the Social Security benefit formula. The result is their PIA, but that’s not always the same as their take-home benefit.
The Social Security Administration runs an additional calculation to adjust benefits up or down for those who don’t claim right at their FRA. Claiming early shrinks checks by 5/9 of 1% per month for up to 36 months of early claiming. Those who sign up more than 36 months early lose an additional 5/12 of 1% per month. This means your checks will be 25% to 30% smaller if you claim at 62.
Delaying benefits, on the other hand, increases a worker’s benefit by 2/3 of 1% per month up until they reach 70. That results in a maximum benefit of 124% to 132% of their PIA.
A Social Security spousal benefit is worth up to half of the worker’s PIA, but there’s a similar penalty for early claiming. If you sign up before your FRA, you’ll lose 25/36 of 1% per month for your first 36 months of early claiming and 5/12 of 1% per month for every month of early claiming beyond that. Unfortunately, there’s no benefit to delaying spousal Social Security beyond your FRA.
You can estimate the size of your spousal Social Security benefit by having your spouse create a my Social Security account. They’ll need to answer some identity verification questions to set it up. Then, they can access several valuable resources, including a calculator that estimates their Social Security benefit at every claiming age.
This calculator makes some assumptions about how long your partner will work and what their income will be during this time. But you can adjust these up or down as necessary. When you feel you’ve accurately estimated their future earnings, look at the benefit amount at their FRA.
On the same page, you should see a tool where you can check the amount of your spousal benefit. Enter your date of birth and desired claiming age to see what you could get.
Coordinating your Social Security strategy is key to maximizing your household benefits. You cannot claim a spousal benefit until your partner signs up for the program. But if you qualify for a retirement benefit in your own right, you may claim this whenever you’re ready.
Timing your claim is crucial if you hope to get the largest lifetime benefit. For many people, delaying benefits is best if it’s feasible. But those with shorter life expectancies and those struggling with their bills might prefer to sign up earlier. Explore a few options to find out what’s best for you.
Sit down with your spouse and select a tentative Social Security claiming age for both of you. Once you know this, you can figure out how much of your retirement income needs your checks will meet and how much you must save on your own.
Many retirees unfortunately find themselves stressed financially. And often, a big reason boils down to the fact that they’re receiving less monthly income from Social Security than they expected. If you want to avoid being disappointed by Social Security once your retirement rolls around, be sure to make these key moves.
You can read up on what the average monthly Social Security benefit looks like at any given point in time. But that doesn’t mean the number you see will be reflective of the benefit you’ll be entitled to.
Image source: Getty Images.
The amount of Social Security you’ll get each month in retirement will depend on different factors, including your 35 highest-paid years of earnings. But there’s a really easy way to get an estimate of your future monthly benefit so there are no unpleasant surprises.
All you have to do is create an account on the Social Security Administration’s website and access your most recent earnings statement. It will contain a summary of your reported wages, as well as an estimate of the future benefit you may be in line for. That way, you won’t sit there thinking you’ll have $3,500 a month from Social Security coming your way if, in reality, $2,400 is a more accurate projection.
Your Social Security earnings statement — and the estimated benefit it shows you — may not account for Social Security cuts. But those are a possibility.
In the coming years, Social Security expects to owe more in benefits than it collects in revenue. Thankfully, it can use its trust funds to keep up with scheduled benefits until that money runs dry. We’re about 10 years away from seeing that happen. But if benefit cuts do end up being necessary, Social Security might pay you about 20% less each month.
Benefit cuts aren’t guaranteed to happen. Social Security has faced financial challenges before, and it’s thus far managed to avoid slashing seniors’ income. But you may want to tell yourself to take the estimated benefit you see and reduce it by 20% — just in case.
You may have more control over the amount of money Social Security pays you than expected. While your monthly benefit is based on your personal earnings history, your filing age will also determine how much monthly income you’ll get. If you delay your filing until age 70, you’ll score a higher monthly payday than you would by filing at an earlier age.
It doesn’t make sense to delay Social Security beyond age 70 since there’s nothing to be gained financially. But you’re allowed to claim Social Security as early as age 62. Waiting until 70 could leave you with much more monthly income, thereby lowering the chance of those benefits disappointing you.
It’s unfortunate that many seniors end up feeling let down by Social Security. Take these steps to avoid feeling the same way once your retirement arrives.
Social Security can go a long way in retirement, and for many people, benefits are a lifeline. In fact, nearly 60% of current retirees say they depend on their benefits as a major source of income, according to a 2023 poll from Gallup, and an additional 29% say it’s a minor income source.
If you’re going to be relying on Social Security to any degree in retirement, it’s wise to maximize your benefits. Everyone’s payments will differ slightly, as your benefit amount depends on factors like your earnings history and the length of your career. However, it can sometimes be helpful to see how your benefit stacks up to the average for your age.
It can also be beneficial to see how those averages compare to the maximum Social Security payments based on age. Here’s how to see where you stand — as well as how to get as close as possible to the maximum benefit.
Image source: Getty Images.
Your benefit amount is based primarily on three factors: your earnings history, the length of your career, and the age you begin claiming.
The Social Security Administration first takes an average of your wages throughout the 35 highest-earning years of your career. That number is then run through a complex formula and adjusted for inflation, and the result is your basic benefit amount — or the amount you’ll collect if you file at your full retirement age (FRA).
Image source: The Motley Fool.
Your FRA will depend on your birth year, but it falls between ages 66 and 67 for everyone. You can file as early as age 62, which will reduce your monthly payments. Or you can delay benefits up to age 70 to receive your basic benefit amount plus a bonus each month.
The age you begin claiming has an enormous impact on your benefit amount, and that’s evident in the average benefit amount among retirees by age.
According to the most recent data from the Social Security Administration released in December 2022, the average retired worker collects around $1,275 per month at age 62. At age 67, that average increases to $1,845 per month, and at age 70 it’s around $1,963 per month.
| Age | Average Monthly Benefit Amount Among Retired Workers |
|---|---|
| 62 | $1,275 |
| 63 | $1,365 |
| 64 | $1,412 |
| 65 | $1,505 |
| 66 | $1,720 |
| 67 | $1,845 |
| 68 | $1,848 |
| 69 | $1,819 |
| 70 | $1,963 |
Source: Social Security Administration. Table by author.
While the average retired worker collects less than $2,000 per month regardless of age, the maximum payments are far higher. In 2024, the most you can receive from Social Security is a whopping $4,873 per month. However, your age will also have a dramatic impact on your maximum possible payments.
To receive the highest possible $4,873 monthly payments, there are three main requirements you’ll need to meet: work for at least 35 years, delay benefits until age 70, and consistently reach the maximum taxable earnings limit.
To calculate your benefit, the Social Security Administration uses an average of your income over the 35 years you earned the most. Working for fewer than 35 years will result in zeros added to your average to account for any time you weren’t working, which will reduce your earnings average and lower your benefit amount.
You’ll also need to consistently reach the maximum taxable earnings limit, or wage cap. This limit is the highest income subject to Social Security taxes, and the closer you can get to it, the higher your benefit will be. It changes annually to account for inflation, but in 2024, it’s $168,600 per year.
Finally, your age will have a major impact on your maximum benefit. The only way to receive the highest possible payment is to wait until age 70 to file, and claiming before that will reduce your monthly checks.
| Age | Maximum Possible Monthly Social Security Benefit |
|---|---|
| 62 | $2,710 |
| 65 | $3,426 |
| 66 | $3,652 |
| 67 | $3,911 |
| 70 | $4,873 |
Source: Social Security Administration. Table by author.
Claiming early can substantially reduce your payments. Even if you meet all the other requirements, if you file as early as possible at age 62, the most you can receive is only $2,710 per month in 2024.
It’s not necessarily a bad thing to file early, but it is important to recognize how your age will affect your benefit amount. Whether your benefit is closer to the average or the maximum payments, choosing your claiming age carefully can help you make the most of Social Security in retirement.
As 2024 has gotten underway, some important Social Security changes have gone into effect. Many people may not have even noticed these changes, but these changes could affect them.
Here’s what you need to know about some important ways Social Security is different this year compared with prior years.
One of the first and most important changes is that full retirement age has shifted. Full retirement age, or FRA, is the age when you’re able to claim your standard Social Security check that’s not reduced by early filing.
For anyone who turned 66 prior to 2024, full retirement age was between the ages of 65 and the age of 66 and six months. But if you’re turning 66 in 2024, your FRA is 66 and eight months. And if you’re not hitting this age until 2026, your FRA is going to be 67 (that’s the latest FRA you can have, regardless of when you were born).
The fact that FRA has moved later means that anyone who is claiming benefits going forward will need to wait a little longer to get their full monthly payment. Future retirees must know that so they can be prepared to work for some extra time or to accept a reduced retirement benefit.
Another change affects current retirees who are trying to work while collecting Social Security benefits. For those in this situation who have not yet reached full retirement age, there are restrictions on what you can earn without seeing your benefit reduced.
If you will not reach FRA the entire year, you can earn up to $22,320 in 2024 without seeing benefits reduced. After that, your Social Security income declines by $1 for each $2 earned. If you’ll reach FRA at some point in 2024 but haven’t already, you can earn up to $59,520 before seeing benefits reduced by $1 for every $3 above that threshold.
While the decline is temporary and benefits are recalculated at full retirement age to adjust for income missed, losing benefits can still be a burden if you were counting on them. The good news is, these limits are up from $21,240 and $56,520 in 2023. So those trying to get both a paycheck and Social Security can earn more this year without seeing part or all of their Social Security checks temporarily disappear.
There’s one more big change you may not have noticed yet. The maximum wage subject to Social Security tax has gone up.
In 2023, workers paid Social Security taxes on income up to $160,200. But in 2024, they’ll pay taxes on up to $168,600 in earnings. This means high earners with incomes topping $160,200 will be paying more in Social Security tax this year. They’ll also get larger future benefits, though, since retirement check amounts are based on the average salary earned over your career — up to the maximum taxable wage.This maximum exists to prevent very high earners from getting huge benefits.
You may not have noticed these big shifts in Social Security yet, but you should pay attention to them now. They could affect when you claim benefits, how much you can work, and what taxes you may have to pay. These are pretty important financial matters that you definitely should know about.
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Social Security benefits help support you in retirement by replacing some of the income you were earning before you left the workforce. But they do not replace as much of your earnings as you might think — and the replacement rate has fallen over time.
Here’s what you need to know about how much of your pre-retirement income Social Security will actually replace when the time comes for you to start claiming.
Image source: Getty Images.
When the Social Security benefits program was first designed, retirees had a designated “full retirement age” (FRA) of 65 years old. This was the age when they could leave their job, claim Social Security, and get their “standard” benefit. The standard benefit for someone who claimed it at 65 was intended to replace around 40% of pre-retirement income
However, in 1983, Social Security was amended, and full retirement age has gradually been shifting later. For anyone born between 1943 and 1954, for example, FRA was moved to the age of 66. It then increases in two-month increments until 67, which is the FRA for anyone born in 1960 or later.
As FRA has changed, the replacement rate has also changed. In fact, according to the Center on Budget and Policy Priorities, a person who worked all their adult life, had average earnings, and retired at the age of 65 would see a replacement rate of about 37%.
That may not seem like a big drop from the original replacement rate of 40%, but with millions relying on Social Security as their primary source of income, even that small change can have a substantial impact on their retirement and financial security.
While the replacement rate for the average wage earner is about 37%, many factors affect how much of your personal income Social Security benefits will replace. Of course, one of the most important factors is how much you earned in your own career.
For example, if you retired at a full retirement age of 66 and 8 months in 2024, here’s what you can expect your replacement rate to be based on three scenarios:
Higher earners replace less of their income because the Social Security benefits formula is progressive. Lower earners get back a higher percentage of their average wages when their benefit is calculated.
The reality, though, is that the change to full retirement age always means you’ll get less lifetime Social Security income because you either have to retire later (and pass up several months of benefits) to get your standard benefit or accept a reduction.
You should be prepared for the fact Social Security is unlikely to replace enough of your earnings that you can live on it without supplementary savings. That means socking money away in your 401(k), IRA, or other accounts as early as you can so you can be prepared in your later years.