Social Security’s 2024 COLA, While Modest, Could Still Trigger Higher Taxes

What You Need to Know

Though the COLA is smaller than the prior two years’ adjustments, it could still push seniors over key thresholds.
The Senior Citizens League warns that many cash-strapped seniors could be surprised by higher taxes in the years ahead.
The group advocates for adjusting these income thresholds to today’s dollars and continuing to do so annually.

The 3.2% Social Security cost of living adjustment (COLA) for 2024 announced Thursday is well above the 2.6% average over the past 20 years, but a new retirement survey by The Senior Citizens League suggests older adults are still broadly pessimistic about their finances.

According to the survey, some 68% of odler adults report that their household expenses remain at least 10% higher than one year ago, although the overall inflation rate has slowed.

And, as Mary Johnson, the league’s Social Security and Medicare policy analyst, highlighted in a call with ThinkAdvisor, there is also widespread concern about what the relatively modest 2024 COLA could mean for the taxes seniors pay on their federal government benefits.

As many as 26% of survey participants who have received Social Security for more than three years reported paying taxes on a portion of their benefits for the first time during the 2023 tax season — i.e., for tax year 2022.

“Because Social Security recipients received an even higher COLA of 8.7% in 2023, we expect more beneficiaries to become liable for federal income taxes on their Social Security benefits for the first time in the upcoming 2024 tax season,” Johnson warned.

A COLA Conundrum

To be clear, Johnson said she is happy to see the 2024 COLA, noting that the cost-of-living adjustment hardwired into the Social Security benefit formula has been essential in keeping more seniors out of poverty during retirement since its adoption in 1973.

However, she argues Congress should move forcefully to address what she sees as a clearly unintended consequence of the taxation rules around the program.

“Up to 85% of Social Security benefits can be taxable when income exceeds certain thresholds,” Johnson explains. “Unlike other parts of the federal income tax code, though, the income thresholds that subject Social Security benefits to taxation have never been adjusted for inflation.”

Consequently, as Social Security income increases steadily over time due to COLAs, that can bump more retirees over the thresholds that triggers the tax on their Social Security benefits and can increase the portion of benefits that may be taxable. Johnson said the survey results show this is more than a theoretical concern, and she worries many retirees will be caught off guard by unexpected tax bills in 2024 and beyond.

According to Johnson, most seniors already worry that their retirement income won’t be enough to cover the cost of essentials, and so any additional hit to their budgets should be viewed with real concern.

A Difficult Policy Fix

The Senior Citizens League advocates for adjusting these income thresholds to today’s dollars and continuing to do so annually — as is done for the rest of the tax code.

As Johnson noted, the current thresholds for individuals mean that those with incomes between $25,000 and $34,000 may have to pay income tax on up to 50% of their benefits, while those earning above the $34,000 amount will see taxes assessed on 85% of benefits.

According to Johnson, if the individual income thresholds were adjusted for inflation from 1984 to today’s dollars, then the individual filing status threshold of $25,000 would be about $75,000. The higher $34,000 threshold amount would be about $101,000.

For couples, taxes kick in when income is between $32,000 and $44,000, at which level the couple may have to pay income tax on up to 50% of benefits. Above the $44,000 level, up to 85% of benefits may be taxable.

If the joint filing status were adjusted for inflation from 1984 to today’s dollars, Johnson said, that $32,000 figure would be about $95,500, and the $44,000 threshold would be about $131,300.

Obviously, changing the taxation of Social Security benefits is a complex task because the revenues from this tax form an important source of funding for the Social Security and Medicare trust funds.

Revenues from the 50% level of taxation go to the Social Security Trust fund, which is estimated to receive $840 billion in revenues from the tax on benefits from 2023 through 2032,” according to the league’s analysis. Revenues from the 85% level go to the Medicare Trust Fund, and between 2023 and 2032, the Medicare Hospital Insurance Trust Fund will receive about $599 billion from the taxation of Social Security benefits.

“To lift the income thresholds that subject Social Security benefits to taxation without worsening program solvency, responsible legislation would need to replace these revenues from other sources of revenues,” Johnson warned.