Social Security checks soared in 2023. That almost certainly won’t be the case next year.
In March, approximately 66.4 million people received a Social Security benefit. The vast majority of these recipients are retired workers, many of which rely on their monthly Social Security check to cover some portion of their living expenses.
For retirees, no event bears more importance than the annual cost-of-living adjustment (COLA) announcement from the Social Security Administration during the second week of October.
How are Social Security’s annual “raises” calculated?
COLA is the “raise” passed along to Social Security beneficiaries most years and is designed to help recipients keep pace with inflation. If the price for goods and services climbs, benefits should, ideally, rise by a commensurate amount to ensure that beneficiaries don’t lose any purchasing power. You’ll note I’m putting “raise” in quotation marks, which reflects that this is an increase in benefits to match the prevailing rate of inflation and not to outpace it.
Prior to 1975, Social Security’s COLAs were arbitrary and assigned by special sessions of Congress. In fact, beneficiaries in the 1940s didn’t enjoy a single increase to their monthly check. Since 1975, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) has served as the program’s annual inflationary measure.
Although it might sound complicated, calculating Social Security’s COLA is relatively straightforward. The average monthly CPI-W readings from the third quarter (July September) of the previous year are compared to the average monthly CPI-W readings from the third quarter of the current year. If the CPI-W readings have increased from one year to the next, prices have risen and beneficiaries will receive a “raise.” The percentage increase in average CPI-W readings from one year to the next, rounded to the nearest tenth of a percent, equates to the COLA for the upcoming year.
If prices fall from one year to the next, there’s no COLA. Thankfully, deflation doesn’t reduce Social Security benefits.
How much are Social Security benefits expected to increase in 2024?
In 2023, Social Security’s 66.4 million beneficiaries enjoyed a historic increase to their monthly check. The 8.7% cost-of-living adjustment they received was the highest year-over-year percentage increase since 1982. In nominal dollars, it represents the largest payout increase since Social Security payouts began in 1940. The average retired worker saw their monthly check jump by roughly $146 this year.
But what about Social Security’s 2024 COLA?
The primary reason the program’s cost-of-living adjustment soared this year is because of historically high inflation in 2022. Rapidly rising prices for oil and natural gas, coupled with a big uptick in food and shelter costs, led to 2023’s sizable benefit boost.
To counter this significant uptick in the price for goods and services, the Federal Reserve has been raising interest rates at the fastest pace in more than four decades. While these actions have begun to cool the prevailing rate of inflation, it also means the expected “raise” Social Security beneficiaries will receive in 2024 is falling.
A little over three weeks ago, the U.S. Bureau of Labor Statistics released its Consumer Price Index Summary for April. In that report, we learned that the CPI-W increased 4.5% over the last 12 months, which is already a far cry from the 8.7% COLA passed along this year. Based on the declining trajectory of the inflation rate we’ve witnessed over the past couple of months, it’s led nonpartisan senior advocacy group The Senior Citizens League (TSCL) to opine that 2024’s cost-of-living adjustment “will be lower than 3%.”
What would a 3% cost-of-living adjustment look like for the typical Social Security beneficiary? For the average retired worker, it would equate to a monthly benefit increase of $55. Meanwhile, long-term disabled workers and survivors could expect a monthly payout bump of $45 and $43, respectively. Keep in mind that these estimates are for a 3% COLA, and TSCL appears to be guiding for a COLA of less than 3% for 2024.
Social Security’s 2024 COLA may be another disappointment
Admittedly, a COLA of anywhere around 3% would be an improvement over the generally low COLAs beneficiaries dealt with throughout the 2010s. Unfortunately, a couple of years of above-average “raises” aren’t going to rectify one of the biggest issues facing Social Security.
One year ago, TSCL released an analysis comparing the aggregate cost-of-living adjustments beneficiaries have received since the start of the century to the actual inflation seniors have contended with over the same span. TSCL found that the purchasing power of Social Security income has declined by an almost unfathomable 40% since 2000.
The culprit for this steady loss of purchasing power is none other than the CPI-W.
Despite being an improvement over the 11 arbitrary COLAs passed along by Congress between 1950 and 1974, the CPI-W doesn’t do a particularly good job of measuring the expenses that matter most to seniors (i.e., the beneficiaries that make up the bulk of Social Security’s recipients).
As the CPI-W’s full name gives away, it’s an index that tracks the spending habits of “urban wage earners and clerical workers.” These are usually working-age Americans who aren’t receiving a Social Security benefit. More importantly, they’re spending their money very differently than retired workers. Seniors tend to devote a higher percentage of their monthly expenditures to medical care and shelter than working Americans. However, this isn’t being recognized by the CPI-W, which is resulting in annual COLAs that aren’t keeping pace with the rate of inflation seniors are contending with.
No matter the size of the payout increase Social Security’s beneficiaries receive in 2024, the only certainty is that it still won’t be enough to make up for the substantial loss of purchasing power they’ve endured since the beginning of the century.
