Social Security's 2024 COLA Is Shaping Up to Be a Double-Edged Sword for Retirees

The most important day of the year for Social Security’s nearly 67 million beneficiaries is now just 25 days away.

On Thursday, Oct. 12, 2023, the U.S. Bureau of Labor Statistics (BLS) will release the September inflation report. This report provides the final puzzle piece needed to calculate Social Security’s cost-of-living adjustment (COLA) for the upcoming year.

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All eyes are on Social Security’s upcoming cost-of-living adjustment announcement

COLA is the fancy term the Social Security Administration (SSA) uses to describe the “raise” beneficiaries receive most years to account for inflation — the rising price of goods and services they’ve contended with. Ideally, benefits should move higher in lockstep with inflation to ensure that the program’s beneficiaries aren’t losing any of their purchasing power.

Additionally, note that “raise” is in quotation marks. This is to signify that Social Security’s COLA is designed to match the prevailing inflation rate. That’s different from a raise an employee might receive, which may outpace the rate of inflation.

For the past 48 years, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) has been the inflationary tether of America’s top retirement program. But despite the CPI-W being reported on a monthly basis, only three months (July through September) factor into Social Security’s annual COLA calculation.

The SSA takes the average CPI-W reading during the third quarter (Q3) of the current year and compares it to the average CPI-W reading from Q3 of the previous year. If the value has increased, it signifies that inflation has occurred. The magnitude of the payout bump beneficiaries receive in the upcoming year is simply the percentage difference between the two Q3 readings, rounded to the nearest tenth of a percent.

In the rare instance that deflation occurs and prices fall on a year-over-year basis, benefits remain unchanged the following year. This has only happened three times since 1975. 

Social Security’s 2024 COLA is inching higher

Last week, on Wednesday, Sept. 13, the BLS unveiled the August inflation report, which is the second of three puzzle pieces needed to calculate Social Security’s cost-of-living adjustment. Based on previous estimates and the information we received via the August inflation report, it would appear that next years’ “raise” is creeping higher.

US Inflation Rate Chart

US Inflation Rate data by YCharts.

Following the two previous BLS inflation reports (i.e., the June and July inflation reports), non-partisan senior advocacy group The Senior Citizens League estimated that Social Security’s COLA in 2024 would come in at 3%. But following the August inflation report, TSCL senior policy analyst Mary Johnson now believes the program’s COLA could hit 3.2%. 

What would a 3.2% COLA actually look like in dollar terms? As of August 2023, the average retired worker was bringing home a monthly check totaling $1,840.27.  A 3.2% COLA would put almost $59 per month extra into the pockets of the typical retired worker in 2024.

Workers with disabilities and survivor beneficiaries wouldn’t be left out, either. Based on monthly payouts of $1,486.83 for workers with disabilities and $1,454.48 for all survivor beneficiaries as of August, a 3.2% cost-of-living adjustment would respectively add almost $48 more per month for long-term disabled workers and close to $47 per month for the survivors of workers who’ve passed away.

The catalyst behind this potentially juicier “raise” in 2024 is that the U.S. inflation rate is picking back up. For instance, even though energy costs are slightly lower on an unadjusted trailing-12-month basis, as of August, West Texas Intermediate crude oil hit its highest level in 10 months this past week. Translation: prices at the pump are beginning to move up, once again.

Furthermore, core inflation has been stubbornly high. “Core inflation” removes food and energy costs from the equation. Of note, shelter costs are up 7.3% over the trailing year — and shelter has the largest weighting of any expense category.  

A visibly worried couple examining their finances while seated at a table in their home.

Image source: Getty Images.

Social Security’s 2024 COLA could be a double whammy for retirees

Considering that beneficiaries have enjoyed a COLA north of 3% only three times over the past 14 years, a 3.2% COLA in 2024 would likely be welcome, even though it would be a far cry from the historic 8.7% increase they received this year.

Unfortunately, Social Security’s 2024 COLA is shaping up to be something of a double-edged sword for retirees. No matter how big or small of a “raise” they receive, a double whammy awaits.

Perhaps the biggest issue for Social Security’s nearly 50 million retired-worker beneficiaries is that their Social Security dollars are losing purchasing power over time. To be blunt, the CPI-W is doing a terrible job of accounting for the inflation that matters to seniors.

The issue with the CPI-W can be found in its name. It’s an inflationary index that caters to the spending habits of “urban wage earners and clerical workers.” These are often working-age Americans who aren’t receiving a Social Security benefit.

Meanwhile, more than 80% of Social Security’s beneficiaries are aged 62 and above. Allowing the CPI-W to determine annual COLAs is leading to key spending categories for seniors (e.g., shelter and medical care) being underweighted. The end result is a 36% loss of purchasing power since the century began, according to TSCL. A 3.2% COLA, or some “raise” somewhere in this vicinity, isn’t going to reverse this persistent loss of purchasing power over time — especially with shelter inflation remaining well above historic norms.

But that’s not the only concern in 2024 for retirees.

In late March, the Medicare Trustees Report forecast an increase in Part B premiums for the upcoming year of nearly $10 per month ($164.90/month to $174.80/month).  Medicare Part B covers outpatient services, and the monthly premiums for Part B are often automatically deducted for Social Security recipients. Even though Part B premiums declined last year, which is a true rarity, a 6% estimated increase in Part B in 2024 would fully offset Social Security’s COLA for many low-earning beneficiaries.

Worse yet, the Medicare Trustees Report estimate may still be light. According to Mary Johnson, the 2023 U.S. Food and Drug Administration approval of Alzheimer’s drug Leqembi, which carries a $26,500 annual price tag, could singlehandedly add $5 per month to Part B premiums for 2024. 

It’s looking like, one way or another, Social Security’s 2024 cost-of-living adjustment won’t pack much of a punch.

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