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Retirement


SOCIAL SECURITY COLA 2024: HOW MUCH WILL BENEFITS INCREASE NEXT YEAR?


JULY INFLATION REPORT SUGGESTS NEXT YEAR’S BOOST LIKELY TO BE AROUND 3%,
ANALYSTS SAY

--------------------------------------------------------------------------------

By

Andy Markowitz,

 

AARP
En español
Published August 10, 2023
Javier Zayas Photography / Getty Images
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After two years that saw Social Security cost-of-living adjustments (COLAs) soar
to their highest level in four decades, beneficiaries will likely see a more
modest increase in their monthly payments next year.



The inflation gauge used by the Social Security Administration (SSA) to set the
annual COLA rose at a 2.6 percent annual rate for July — the first of three
months the agency uses to determine the final figure, slated to be announced in
October. 

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“Current projections are for inflation to tick up slightly in August and then
again in September,” says Emerson Sprick, senior economic analyst at the
Bipartisan Policy Center. He estimates the 2024 COLA will land at about 3
percent. That would boost the average Social Security retirement benefit —
$1,837 a month in June 2023 — by about $55 a month in 2024.



It would also mark a significant shift from the past two years, which saw COLAs
of 5.9 percent and 8.7 percent, the biggest benefit adjustments in percentage
terms since the early 1980s. The inflation-fueled increases raised the average
retirement benefit by $92 in 2022 and $146 this year.



Other analysts, including Preston Caldwell, a senior U.S. economist at
Morningstar; Alicia Munnell, director of the Center for Retirement Research at
Boston College; and Richard Johnson, director of the Urban Institute’s Program
on Retirement Policy, say they expect a 2024 COLA of around 3 percent.



That "might seem like a letdown" for Social Security recipients, Sprick says,
"but it’s important to note that the COLA is calculated so that it exactly
offsets the price increases consumers have faced, as measured by the Consumer
Price Index, since the last COLA was determined."




“More broadly, a 3 percent COLA would be a great sign that inflation is getting
under control, which is particularly important for those on fixed incomes,” he
adds. “Having stable prices is highly preferable to having large COLAs."



All forms of benefits — retirement, disability, family and survivor — are
affected by the COLA. The adjustment takes effect with December Social Security
payments, which most beneficiaries will receive in January 2024.




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HOW SOCIAL SECURITY CALCULATES THE COLA




Social Security COLAs are tied to the Consumer Price Index for Urban Wage
Earners and Clerical Workers (CPI-W), a measure of price changes for a selection
of goods and services, including food, energy and medical care, that is reported
monthly by the federal Bureau of Labor Statistics.




The CPI-W is a subset of the main Consumer Price Index, which measures a broader
range of retail prices and is considered the “headline” number in reporting on
inflation. (The main index ran higher in July, at 3.2 percent, up from 3 percent
in June.) To determine the COLA, the SSA compares the average CPI-W for July,
August and September of each year to the figure for that same period the year
before.

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2022 were 9.1 percent, 8.7 percent and 8.5 percent, respectively. Over the full
quarter, the index was 8.7 percent higher on average than for the same period in
2021, resulting in the COLA that took effect at the start of this year.



If projections hold, next year’s benefit adjustment will be more in line with
the pre-pandemic period of relatively low inflation. Through the 2000s and
2010s, the COLA averaged about 2.2 percent. If there is no inflation, there’s no
COLA — that happened in 2010, 2011 and 2016. The biggest adjustment ever was
14.3 percent in 1980.




WILL THE COLA KEEP PACE WITH INFLATION?




Studies by the Center for Retirement Research show that Social Security benefits
generally keep up well with inflation in the long term but can lag during
short-term periods of volatility, depending on whether the price index is
trending up or down when the COLA is set.




For example, beneficiaries lost buying power in 2021 and 2022 when COLAs of 1.3
percent and 5.9 percent, respectively, were outpaced by surging inflation that
peaked at around 9 percent in mid-2022. This year saw the opposite effect:
Inflation was cooling by the time the 8.7 benefit boost took effect and has
remained well below the COLA level.



While considerably smaller, this year’s COLA could have a similar effect if
inflation continues to decline in 2024, as many economists predict.



“My analysis [is] that inflation is trending down, even though there was an
uptick in the trailing 12-month rate of return” in July, says Mark Hulbert, a
finance analyst and columnist for MarketWatch. “It’s not a huge benefit, but the
fates may smile slightly in the sense that if indeed inflation continues to
trend downward, then inflation for calendar 2024 is likely to be slightly less
than what we will see the COLA be.” 



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“The good news for older people is that health care costs have actually fallen
over the past 12 months. The bad news is that housing costs have gone up quite a
bit,” Johnson says, citing sector-specific data from the July CPI report, issued
Aug. 10. “But overall, inflation has moderated substantially since last year.”



He adds, “We don’t know how things are going to look next year, but given that
the [Federal Reserve] has done so much work to raise interest rates and tame
inflation, and since the Fed seems very committed to that goal, I certainly
don’t expect inflation to take off in 2024.”



Another factor affecting the COLA’s value as a hedge against inflation
is Medicare costs, notes Heather Schreiber, a retirement income certified
professional and the writer of Heather Schreiber's Social Security Advisor, a
newsletter for financial professionals.



A rise in the Medicare Part B premium in 2024 would offset a portion of the COLA
increase for Social Security recipients who have premiums deducted directly from
their benefit payments, as do about 70 percent of Medicare enrollees. 



In their 2023 annual report, issued in March, Medicare’s trustees estimated that
the standard Part B premium paid by most enrollees would be $174.80 a month next
year, up $9.90 from the current rate, but that figure is preliminary. The actual
premium is usually announced in the fall.



Because they can affect premiums, “the rising costs of Alzheimer's drugs covered
by Medicare may also play a role in determining the final benefit amount for
2024,” Schreiber says.


%{postComment}%

Andy Markowitz covers Social Security and retirement for AARP. He is a former
editor of the Prague Post and Baltimore City Paper.


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MEMBERS ONLY
Health & Wellness

AARP Long-Term Care Options from New York Life

Custom long-term care options to fit your needs and budget

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Financial Planning

Interview an Advisor™ Tool

A free resource to help you assess a financial advisor

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AARP MEMBERSHIP

Join or Renew Today

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234
 * 
 * 
 * 
 * 


 * MEMBERS ONLY
   Finances
   
   High Yield Savings from Marcus by Goldman Sachs®
   
   Rate bonus on high-yield online savings account
   
   Learn More
   See more Finances offers >
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 * MEMBERS ONLY
   Health & Wellness
   
   AARP Long-Term Care Options from New York Life
   
   Custom long-term care options to fit your needs and budget
   
   Learn More
   See more Health & Wellness offers >
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 * Financial Planning
   
   Interview an Advisor™ Tool
   
   A free resource to help you assess a financial advisor
   
   Learn More
   See more Financial Planning offers >
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   Learn More
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