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.
