Falling inflation would naturally mean a smaller annual cost-of-living adjustment for Social Security recipients, but a new long-term inflation forecast released by The Senior Citizens League today finds early indications are that 2025’s increase could be much smaller than this year’s 3.2% raise.
Millions of Social Security beneficiaries are facing an inflation rollercoaster this year, TSCL warns, while adding that at the same time, they may be learning that they owe taxes on their 2023 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 announced by the Social Security Administration last October.
“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,” said 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, who after nearly three decades with TSCL has become a leading prognosticator of next-year Social Security COLA increases cited by media far and wide, also announced in Thursday’s release that she herself will be retiring as of March 15, 2024. While TSCL will surely continue to provide monthly forecasts for the following year’s COLA based on the latest inflation data, Johnson’s insights, attentiveness, and no-nonsense explanations about how inflation and COLA changes impact Social Security beneficiaries will be missed.
Johnson also stressed in Thursday’s release that 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 TSCL’s latest survey. During the 2023 tax season, 23% of survey participants who received Social Security for three years or more said they paid tax for the first time.
This trend will likely continue in the 2024 tax season due to the 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, Johnson explains.
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.
Johnson added that 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.
SEE ALSO:
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