Reality Check for Social Security COLA: 2024 Projections Hint at Subdued Rise

Social Security’s Cost of Living Adjustment (COLA) trajectory appears to be shifting to a more moderate path in 2024, following a significant surge witnessed in 2024. Analysts predict that retirees might experience a cost of living adjustment in the vicinity of 3%, a figure considerably lower than the previous year’s COLA surge.

As inflation shows signs of stabilizing, the likelihood is increasing that Social Security benefits won’t undergo as substantial an upswing next year as they did in 2024. Forecasts from the Senior Citizens League, a nonpartisan advocacy group that closely monitors inflation data to offer forward-looking COLA projections, suggest that retirees may encounter an adjustment around the 3% range. This projection is less than half of the COLA boost witnessed in 2024.

A subsequent estimate, set for release on September 13th, is anticipated to vary depending on new inflation data for August. It will be clear what the exact percentage will be for the inflation adjustment by mid-October.

In the current year, the COLA translated to an 8.7% upturn for both Social Security and Supplemental Security Income benefits, marking the most substantial rise since 1981’s inflation adjustment of 11.2%. Notably, the cost-of-living adjustment for 2024 was a robust 5.9% as well.

It is advisable not to preemptively count on the magnitude of the upcoming increase in Social Security benefits. Nevertheless, certain observers consider an increase in the range of 2.7% to 3.2% to be a strong possibility.

According to Mary Johnson, a policy analyst at the Senior Citizens League, there is a growing awareness of the actual situation regarding these modifications. She noted that while the estimated 3% adjustment is a step towards normalcy, it still surpasses the historical average. Over the past twenty years, the average inflation adjustment for Social Security benefits stood at 2.6%. In three years – 2010, 2011, and 2016 – there was no inflation adjustment or a 0% increase.

Inflation adjustments were relatively modest before the COVID-19 pandemic, supply chain disruptions, and extensive federal stimulus. During 2020, the inflation adjustment for Social Security benefits was 1.6%, followed by a 1.3% increment in 2021. However, compared to last year’s significant increase of 8.7%, the projected 3% adjustment may still be considered a significant change for seniors who are on a tight budget.

The mechanism behind inflation’s influence on Social Security payments 

A specific formula in the Social Security Act is employed to calculate the forthcoming inflation adjustment. This calculation relies on monthly changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers during July, August, and September.

The U.S. Bureau of Labor Statistics is expected to release inflation data for August. September 13th at 8:30 a.m. and for September on October 12th.Recent data indicated a 3.2% increase in the consumer price index in July over the previous year. Moreover, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) recorded a 2.6% rise over the past twelve months up to July.

The July, August, and September inflation figures are aggregated and averaged to calculate the Social Security adjustments. This year’s third-quarter average will be compared with the third-quarter average from the previous year. The percentage difference between these two averages constitutes the COLA amount applicable to the check received in January 2024.

If the COLA ends up being 3%, as forecasted by the advocacy group, then the typical monthly Social Security retirement benefit might go up by around $55 per month. To provide some background information, the average monthly benefit for retired workers was adjusted to $1,827 in January this year after the COLA increase. An additional $55 could result in an extra $660 per year.

Comparatively, in 2024, the COLA adjustment translated to an additional $146 per month based on an average benefit of roughly $1,681 for all retired workers, resulting in an average increase of $1,752 for the year.

According to Social Security data, approximately 71 million individuals nationwide were beneficiaries of Social Security and/or Supplemental Security Income as of June.

Inflation’s Outlook 

While some economists don’t anticipate a linear decrease in inflation, the prevailing expectation is for inflation to gradually subside following the Federal Reserve’s implementation of eleven interest rate hikes since March 2024.

Inflation might exhibit periodic spikes, particularly if rapid wage growth occurs, leading to subsequent price hikes for certain goods. Omair Sharif, founder and president of Inflation Insights in Pasadena, California, projections forecast the year-over-year consumer price index to hover around 3.6% to 3.7% in August and approximately 3.5% to 3.6% in September. This would mark an increase from July’s year-over-year figure of 3.2%. Sharif anticipates a decline in the subsequent months of October and November.

Comerica Bank’s chief economist, Bill Adams, foresees the Federal Reserve abstaining from raising interest rates during its upcoming two-day meetings in September. However, after a rate hike in November, Comerica predicts that the Federal Reserve might shift course and commence interest rate reductions within the first half of 2024. Adams indicates that a projected consumer price index of about 3.3% in year-over-year terms for September could correspond to a CPI-W figure of around 3%.

Potential Tax Implications for Retirees 

Retirees relying on Social Security, alongside pensions or withdrawals from 401(k) accounts, might encounter challenges when navigating their 2024 tax returns.

Retirees often face the challenge of navigating the complex taxation rules for Social Security benefits and may need to carefully assess their tax situation. When an individual files their taxes, they may be required to pay income tax on a maximum of 50% of their Social Security benefits if their combined income falls within the range of $25,000 to $34,000. To calculate the combined income, one must add the adjusted gross income, nontaxable interest, and half of the Social Security benefits.

A similar scenario applies for joint filers, with up to 50% of Social Security benefits potentially taxable if combined income falls between $32,000 and $44,000. Furthermore, the IRS indicates that up to 85% of Social Security benefits could be taxable in specific cases, particularly if certain conditions are met.

As inflation-driven adjustments bolster Social Security benefits in 2024, they might inadvertently push retirees into higher tax brackets. This is because the taxation thresholds for Social Security benefits haven’t been adjusted for inflation, leading to a broader range of retirees facing taxes on a portion of their benefits as their incomes grow.

Mary Johnson points out that modifying how Social Security benefits are taxed is a complex endeavor, as the revenue generated from these taxes plays a crucial role in funding the Social Security and Medicare trust funds.

Unveiling the Impact on Benefits

It’s important to recognize that the projected $55 monthly increase resulting from a 3% COLA adjustment won’t uniformly apply to all recipients. Individuals receiving a $1,000 monthly Social Security retirement benefit may only experience a $30 raise based on a 3% adjustment. The actual COLA calculation remains uncertain, so the final hike could be lower than anticipated.

The full impact of a COLA increase won’t be known for Medicare beneficiaries until new Medicare Part B premiums are disclosed later in 2024. These premiums could potentially offset a significant portion of the COLA boost.

In March, the Medicare trustees projected a potential $10 monthly increase in the standard Part B premium, reaching $174.80 in 2024. Moreover, an additional $5 could be added to cover administrative costs tied to the new Alzheimer’s drug, lecanemab.

As Social Security beneficiaries navigate these adjustments and potential tax implications, the complex interplay between inflation, benefits, and taxation continues to shape the financial landscape for retirees.