Social Security benefits typically rise every year thanks to the program's annual cost-of-living adjustment (COLA), which tries to ensure that retirees don't lose purchasing power due to inflation.
This year, retirees got an 8.7% increase in their benefits, one of the largest increases in roughly four decades thanks to soaring levels of inflation in 2022. While 2023 has just started, it's never too early to start looking at what the 2024 COLA might be.
While there's still a lot that needs to play out this year, here's what we know about the 2024 COLA and how much benefits could rise next year.
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How the COLA is calculated
While the COLA is based on inflation, the Social Security Administration (SSA) has a very specific formula for calculating the annual COLA, which is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W tracks the prices on a market basket of consumer goods and services.
To calculate the COLA, the SSA takes the average monthly CPI-W number in the third quarter of the year, which includes the months of July, August, and September. Then it compares that number to the average monthly CPI-W for the third quarter of the past year. The percentage difference between these two numbers is the COLA for the following year. There can't be a negative COLA. Here are the annual COLAs from the last decade:
- 2013 -- 1.7%
- 2014 -- 1.5%
- 2015 -- 1.7%
- 2016 -- 0%
- 2017 -- 0.3%
- 2018 -- 2%
- 2019 -- 2.8%
- 2020 -- 1.6%
- 2021 -- 1.3%
- 2022 -- 5.9%
- 2023 -- 8.7%
How's the 2024 COLA looking?
While we won't know the exact COLA for next year until the third quarter, there are some indications in recent months that provide clues.
For instance, in recent months, inflation has started to slow as the Federal Reserve's intense rate hikes in 2022 have started to affect the economy. The Consumer Price Index for All Urban Consumers (CPI-U), which is different from the CPI-W but trends similarly, fell 0.1% in December on a monthly basis and was up 6.5% year over year. While that number is certainly still high, it's markedly lower than when the CPI-U clocked in at 9.1% year over year last June.
With the economy still not feeling the full effect of the Fed's rate hikes, the CPI should continue to trend lower on a year-over-year basis. According to several international agencies and economic organizations, the CPI-U could end 2023 3.5% higher than in 2022. The Federal Reserve Bank of St. Louis projects that the headline CPI will grow 3.4% this year.
A reasonable estimate
As we've seen over the last couple of years, economic conditions can change pretty quickly, and there is still a lot of uncertainty in the environment. Oil prices could end up shooting higher and taking inflation with them, so just keep in mind that nothing is definite.
But based on where things stand and given the number of interest rate hikes the Fed just did, I would expect the CPI to continue to move lower and work its way closer to that 3.5% year-over-year CPI number.
It may not be at that level in July, August, or September, which are the months the SSA uses to calculate the COLA, so right now I would expect the 2024 COLA to end up in the 3% to 5% range. That's below the 2022 and 2023 COLAs, but still healthy when you look historically.
