For immediate release:
January 16, 2024
Inflation Rate Starts Year Higher than COLA, But Big Drop Ahead
Millions of Social Security beneficiaries are facing an inflation rollercoaster this year. At the same time, they may be learning that they owe taxes on their Social Security benefits. December inflation for the CPI-W, the same price index used to calculate the COLA, indicates that inflation was 3.3%, slightly higher than the 3.2% Social Security cost-of-living adjustment (COLA). “The far bigger story is the long-term inflation model, which suggests the COLA for next year could drop to 1.4% — the lowest level since 2020,” says Mary Johnson, Social Security and Medicare policy analyst for The Senior Citizens League (TSCL). “That’s not necessarily good news if prices for housing, hospital care, auto insurance, and other costs remain at today’s elevated levels,” Johnson says.
Social Security recipients will need to run the numbers this tax season to determine if their Social Security benefits are taxable — perhaps for the first time. The number of Social Security recipients reporting that they paid federal income tax on their Social Security benefits for the first time is climbing, according to the latest survey by The Senior Citizens League (TSCL). During the 2023 tax season, 23 percent of survey participants who received Social Security for three years or more said they paid tax for the first time. The question asked:
“If you received Social Security for more than three years, did you pay federal income tax on a portion of your Social Security benefits for the first time this tax season (April 2023)?
|Not applicable, have not received Social Security for more than three years
TSCL 2023 Retirement Survey November 30, 2023. 4,425 responses
This trend will likely continue in the 2024 tax season due to an 8.7% COLA increase in 2023. “ We expect the higher Social Security income will not only cause more Social Security recipients to pay taxes on their benefits this tax season, but taxes are taking a bigger portion of Social Security checks in 2024,” Johnson says.
The growing number of those getting hit by the tax is due to fixed income thresholds. Unlike federal income tax brackets, the income thresholds that subject Social Security benefits to taxation have never been adjusted for inflation since the tax became effective in 1984. This not only means that more older taxpayers become liable for the tax on Social Security benefits over time, but the portion of taxable benefits can increase as retirement income grows.
To determine what portion of Social Security benefits will be added to taxable income, the IRS requires that taxpayers add:
Adjusted Gross Income (AGI)
+ nontaxable interest
+ Half of Social Security benefits
= “combined income”
- If you file a federal tax return as an "individual" and your “combined income” is:
between $25,000 and $34,000, you may have to pay income tax on up to 50 percent of your benefits.
If you spend more than $34,000, up to 85 percent of your benefits may be taxable.
- If you file a joint return, and you and your spouse have a “combined income” that is:
between $32,000 and $44,000, you may have to pay income tax on up to 50 percent of your benefits.
more than $44,000, up to 85 percent of your benefits may be taxable.
If these thresholds had been adjusted more like federal income tax brackets, the individual filing status level of $25,000 would be over $75,250, and the joint filer level would be more than $96,300 based on inflation through December 2023.
Taxation of Social Security forms an important and growing share of the funds needed to pay the Social Security and Medicare benefits of current retirees. Last year, the Social Security Trustees estimated that in 2024, the Trust Fund will receive $57.3 billion in benefit tax revenues, accounting for about 4% of the financing required to pay benefits. Medicare Trustees estimate that the Medicare Trust Fund will collect about $40 billion in revenues from the tax on Social Security benefits, forming about 10% of the financing needed for payment of Medicare benefits.
One final note to journalists from Mary Johnson. Soon, it will be time for me to take my advice and learn how well it works in real life. After nearly three decades, I’m retiring from my duties with The Senior Citizens League on March 15, 2024. Becoming a spokesperson for The Senior Citizens League has been among my favorite duties. I love hearing your questions and working with each of you. Most of all, I deeply appreciate the confidence you (and your fact checkers) have placed in my analysis, advice, and estimates. Don’t believe the carefree smiley faces you see in the marketing ads. Retirement takes grit and a sense of humor.
I invite you to stay in touch with the League’s Executive Director, Shannon Benton, to learn the latest findings from the Senior Citizens League’s 2024 Senior Surveys and Social Security and Medicare news.