In 2023, people who receive Social Security benefits saw a substantial increase in their payments due to the cost-of-living adjustment (COLA). As a result, retired workers are likely hoping for a similar adjustment in 2024.
Last year, inflation increased significantly due to the pandemic, reaching a level that hasn’t been seen in 40 years. As a result, the cost of rent, groceries, and monthly utilities rose, which created financial difficulties for many people. Over 50% of Americans had to dip into their savings to cover their daily expenses.
Retired workers were particularly affected by these financial difficulties. The stock market crash resulted in trillions of dollars disappearing from retirement accounts, while the purchasing power of Social Security benefits declined due to the overall price increase. However, there was a positive aspect in the form of a historic cost-of-living adjustment (COLA) applied to Social Security payments in 2023.
Social Security benefits received an 8.7% COLA in 2023 to counteract the effects of inflation. This was the most significant increase for retired workers since 1982 and the fourth largest in history. The question now arises whether retired workers can expect another significant COLA in 2024.
The analysis of inflation’s impact on the purchasing power of money plays a crucial role in determining the cost-of-living adjustments (COLAs) for Social Security. Annual COLAs aim to maintain the buying power of Social Security payments by keeping them aligned with inflation. There is debate regarding whether these annual COLAs have kept pace with rising prices, primarily due to the method used to measure inflation. Currently, the amount of COLAs is decided by looking at the changes in the CPI-W (Consumer Price Index for Urban Wage Earners and Clerical Workers ).
However, some experts argue that the CPI-W underestimates the inflation experienced by the senior population, suggesting an alternative metric called the Consumer Price Index for the Elderly (CPI-E).
Regardless of this debate, retired workers must understand how COLAs are calculated under the current law. The CPI-W from the current year’s third quarter is divided by the CPI-W from the previous year’s third quarter, and the resulting percentage increase (if any) becomes the COLA for the following year. For instance, if the CPI-W increased by 8.7% in Q3 2022, an 8.7% COLA was applied to Social Security benefits in 2023.
Since the data for the third quarter of 2023 is not yet available, retired workers can estimate the 2024 COLA by comparing the CPI-W data from the past three months to the CPI-W data from Q3 2022. The average CPI-W reading over the last three months shows a 1.5% increase compared to the average CPI-W reading from Q3 2022.
While inflation has significantly slowed over the past year, the CPI-W will likely continue to rise in the upcoming months. Therefore, the 2024 COLA should be no less than 1.5%, but the chances of another 8.7% increase are doubtful.
Senior Citizens League policy analyst Mary Johnson predicts that retired workers will receive a 3.1% COLA the following year. While some may be disappointed by this information, a smaller COLA suggests that inflation is decreasing, ultimately a positive development. It’s important to note that the official announcement of the 2024 COLA will only be made in October 2023, and future inflation trends remain uncertain. Therefore, retired workers should not consider early COLA estimates definitive and should remain cautious.