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The annual increase to the maximum earnings subject to Social Security tax is always a footnote to the announcement of the next Social Security cost-of-living adjustment, but for today’s workers, it might be even more important.
The annual COLA announcement gets the most attention because a real dollar amount is added very soon after to the checks of seniors who are already claiming Social Security, thereby helping them cope with inflation. The boost for 2024 will be 3.2%, which is obviously less than the 8.7% seniors got in 2023 but still amounts to an average $60-a-month increase. Plus, the additions compound on top of each other, so seniors will effectively be getting, on average, around $200 more per month than they were getting in 2022.
The wage base, on the other hand, is what determines what your Social Security check amount will be in the first place. The COLA is just a tweak to that amount. The maximum earnings subject to Social Security taxes will go up 5.2% next year, to $168,600, which is the real key to what will raise benefits down the line for those working today. The tax rate on the income will stay the same at 12.4%, but the maximum real dollar amount a person making $168,600 or more will pay will be $10,453.20, with their employer paying an equal amount. A self-employed person pays double.
This is the money that goes into the system to pay for future benefits, and workers don’t owe this particular tax on earnings above that maximum amount. High earners typically notice this toward the end of the year, after their earnings exceed that maximum and their take-home pay increases slightly.
How wage indexing works
Since the 1970s, the Social Security system has calculated benefits based on the Average Wage Index, which looks at W-2 raw income and has a two-year lag. The annual cost-of-living adjustment is based on the CPI-W, a general consumer-price index that looks back at third-quarter inflation compared with the previous year.
“For this year, we saw wages increase at a faster rate than inflation,” says Devin Carroll, a Social Security expert and financial planner who runs the website Social Security Intelligence.
Carroll says this average wage formula controls a number of factors for Social Security, among them: the maximum taxable wage base, maximum family benefit and the amount needed to earn one credit.
“The increase is good news in terms of Social Security benefits,” Carroll says. “It’s an increase to the future benefit of that amount. As the Average Wage Index increases, that pushes up whatever that wage index is in the year they attain benefits.”
When determining how much you’ll get in Social Security benefits, the agency runs an analysis on your prior earnings and applies a formula based on the AWI that inflates those for wage growth, Carroll explains. So the higher the average wage index is, the higher the indexation of your prior earnings will be.
The cost-of-living-adjustment compounds on top of the base benefit amount for all workers, not just retirees. The COLAs never go away or are negative, so the base just keeps getting bigger.
“The water gets higher for those of us who are not on benefits yet,” says Carroll. “People are so confused about that. Whether you are receiving benefits or not, that will apply a COLA to your benefits, even if you file at 70.”
