Social Security in 2024 and beyond

As I write my final column for InvestmentNews, I’ll end the year the way I began: looking ahead to scheduled changes in Social Security benefits and Medicare premiums for the coming year and putting long-term financing concerns about the nation’s bedrock retirement program into perspective.

The good news is more than 66 million Americans will receive an income boost next year, thanks to a 3.2% cost-of-living adjustment that takes effect in January, increasing the average Social Security benefit by more than $50 per month.

Medicare Part B premiums, which pay for doctors’ fees and outpatient services, are usually deducted directly from monthly Social Security benefits. Part B premiums will increase by about $10 per month to $174.70 per month in 2024, leaving most Social Security recipients with a larger net benefit than this year.

And some higher-income retirees who were on the cusp of paying the dreaded Medicare high-income surcharge this year may avoid it in 2024 as the income thresholds that trigger monthly income-related adjustment amounts, or IRMAA surcharges, increased by $6,000 for single taxpayers and $12,000 for married couples who filed a joint tax return.

Individuals with a modified adjusted gross income of less than $103,000 in 2022 and married couples with a MAGI under $206,000 in 2022 will pay the standard Medicare Part B monthly premium in 2024. Higher-income Medicare enrollees will pay more, ranging from about an extra $70 per month per person to an extra $420 per month per person on top of the standard Part B premium of $174.70 per month.

While monthly cash flow of Social Security income and Medicare premiums may be an immediate concern for many retirees, the long-term finances of the Social Security program are a major worry for both current and future beneficiaries. And those concerns may be prompting some people to claim benefits early, resulting in permanently reduced benefits that could jeopardize their future retirement security.

The 2023 Social Security Trustees Report projects that the combined Old Age, Survivors, and Disability trust fund, currently used to pay for a portion of current Social Security benefits, will be depleted in about 10 years.

“If Congress has not acted by 2034, we will be faced with an automatic 20% cut in benefit to people already receiving benefits, the need to immediately increase Social Security taxes by 25%, or some combination of benefit cuts and tax increases,” a new issue brief from the American Academy of Actuaries warns. “Earlier reform action would allow for tax increases and benefit reductions to be phased in gradually and provide individuals more time to plan and adjust to the changes.”

The implications are clear: congressional inaction on Social Security reform is creating a crisis of confidence in this crucial retirement system.

Three-quarters of adults age 50 and older worry that Social Security will run out of funding during their lifetimes, according to the 2023 Nationwide Retirement Institute survey of more than 1,800 Americans. Separately, the 2023 Schroders US Retirement Survey found that just 10% of non-retired Americans say they will wait until age 70 to receive their maximum Social Security benefits, while 40% of non-retired Americans plan to claim Social Security before their full retirement age, resulting in permanently reduced benefits for the rest of their lives.

That’s unfortunate, said Sri Reddy, senior vice president of retirement and income solutions at Principal, since Social Security, with its annual cost-of-living adjustments and guaranteed income for life, “is the only thing that gives you a perfect hedge for inflation.” Claiming reduced benefits early due to potential long-term funding concerns “is an irrational fear,” Reddy said.

Financial advisors are left to create retirement income plans for their clients using benefit estimates that they aren’t sure they can count on in the future. What’s an advisor to do?

Assure clients that even in the unlikely scenario that Congress fails to act before the trust funds are exhausted, that does not mean Social Security will be bankrupt. There would be enough ongoing FICA payroll tax revenue to fund about 80% of promised benefits. If history is any guide, it is unlikely that Congress would cut benefits for current or near retirees.

For younger clients, advisors should stress-test their retirement income plans. What would happen if their Social Security benefits – not their entire monthly retirement income – were reduced by 20%? Would it devastate their plan? If so, what steps can they take now to save more for retirement?

It has been my honor and pleasure to serve InvestmentNews readers for more than a decade. Thank you, and goodbye.