Social Security COLA 2024 is emerging as a double-edged sword for retirees | ET REALITY


There are only 25 days left until the most important day of the year for the almost 67 million Social Security beneficiaries.

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

A person counting a variety of fanned cash bills in his hands.

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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 “boost” beneficiaries receive most years to account for inflation: the increase in the price of goods and services with which they have had to deal with. Ideally, benefits should increase at the same rate as inflation to ensure that program beneficiaries do not lose any of their purchasing power.

Also, note that “increase” is in quotes. This is to indicate that the Social Security COLA is designed to match the prevailing inflation rate. That’s different from a raise an employee might receive, which can exceed the rate of inflation.

For the past 48 years, the Consumer Price Index for Urban Wage Earners and Office Workers (CPI-W) has been the inflationary thread of America’s main retirement program. But even though the CPI-W is reported monthly, only three months (July through September) are taken into account in the annual Social Security 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 the third quarter of the previous year. If the value has increased, it means that inflation has occurred. The magnitude of the payment increase beneficiaries will receive in the coming year is simply the percentage difference between the two third quarter readings, rounded to the nearest tenth of a percent.

In the rare case that deflation occurs and prices fall year after year, profits remain unchanged the following year. This has only happened three times since 1975.

Social Security COLA 2024 is rising little by little

Last week, on Wednesday, September 13, the BLS released the August inflation report, which is the second of three pieces of the puzzle needed to calculate the Social Security cost-of-living adjustment. Based on previous estimates and the information we received through the August inflation report, it would appear that next year’s “rise” is increasing.

US Inflation Rates Chart

US inflation rate data for Y Charts.

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

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

Workers with disabilities and surviving beneficiaries would also not be excluded. Based on monthly payments of $1,486.83 for workers with disabilities and $1,454.48 for all surviving beneficiaries as of August, a 3.2% cost-of-living adjustment would add, respectively, nearly $48 more per month for long-term and near-disabled workers. $47 per month for survivors of workers who have died.

The catalyst behind this potentially juicier “rise” in 2024 is that the US inflation rate is rising again. For example, although energy costs are slightly lower on an unadjusted 12-month basis in August, West Texas Intermediate crude oil hit a 10-month high last week. Translation: prices at the pump are starting to rise, once again.

Furthermore, core inflation has been stubbornly high. “Core inflation” takes food and energy costs out of the equation. Of note, housing costs increased 7.3% over the past year, with housing having the largest weight of any expense category.

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

Image source: Getty Images.

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

Considering that beneficiaries have enjoyed a COLA higher than 3% only three times in the last 14 years, a COLA of 3.2% in 2024 would probably be welcome, although it would be a far cry from the historical 8.7% increase that 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 the “raise” they receive, they are in for a double whammy.

Perhaps the biggest problem for the nearly 50 million retired working Social Security beneficiaries is that their Social Security dollars are losing purchasing power over time. To be frank, the CPI-W is doing a terrible job of accounting for the inflation that matters to older people.

The problem with the CPI-W can be found in its name. It is an inflation index that takes into account the spending habits of “urban wage earners and administrative workers.” These are often working-age Americans who do not receive any Social Security benefits.

Meanwhile, more than 80% of Social Security beneficiaries are 62 or older. Allowing the CPI-W to determine annual COLAs is causing key spending categories for seniors (e.g., housing and healthcare) to be underweighted. The end result is a 36% loss in purchasing power since the beginning of the century, according to TSCL. A 3.2% COLA, or some “increase” somewhere close, is not going to reverse this persistent loss of purchasing power over time, especially if housing inflation remains well above historical norms .

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

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

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

It looks like, one way or another, Social Security’s 2024 cost-of-living adjustment won’t have much of an impact.

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