Many people on Social Security rely on their benefits to provide the bulk of their income. One key advantage that Social Security offers its participants is that the monthly benefits it pays out are adjusted annually for inflation. Cost-of-living adjustments, or COLAs for short, help older Americans avoid a big loss in purchasing power.
COLAs were especially important for Social Security recipients in 2023 as soaring inflation led to an 8.7% boost to payments starting in January. Yet, even though it's far too early to make firm conclusions about what seniors should expect in 2024, it's entirely possible that COLAs for next year could fall sharply or even disappear entirely.
Finishing 2022 with lower prices
Inflationary pressures have largely abated in the past several months. After soaring 9.8% in the 12 months from June 2021 to June 2022, the Consumer Price Index (CPI-W) has fallen in four of the past six months. As of December 2022, it was below its level from six months previously.
Image source: Getty Images.
A host of factors led to diminishing inflation. Perhaps the most important area was energy prices, as costs for gasoline moved dramatically lower in the second half of 2022 after soaring over the previous year. Reversals in other areas that had seen huge gains, such as vehicle prices, also helped contribute to the turnaround.
How weaker inflation could make 2024's COLA go to zero
To figure out the COLA for each year, administrators within the federal government look at CPI-W readings and plug them into a formula. The numbers for July, August, and September get combined, and then the average for the three months is compared to the average for the same three months in the previous year. The percentage change becomes the COLA for the subsequent year.
The average figure the government used to determine the 2023 Social Security COLA for July through September 2022 was 291.901. That was 8.7% above the corresponding figure of 268.421 for the three summer months in 2021.
The latest reading on CPI-W that's available is the release from the Bureau of Labor Statistics for December 2022. After a sizable increase in October, the inflation gauge moved lower in November and December. By the end of the year, the CPI-W came in at 291.051.
Don't count a 2024 COLA out yet
Obviously, there's still a long way to go before you should worry about not getting a COLA in your Social Security benefits for 2024. Even though there have been numerous reports of inflation rates moderating in recent months, few investors expect outright price declines to take hold for an extended period. All it would take to produce a positive COLA next year would be for the CPI-W to rise a total of 0.3% in the next six to eight months. Anything above that would add more money to Social Security recipients' checks come 2024.
Consumers have already seen signs that the recent trend of tamer price movements could be coming to an end. Prices at the pump have hit bottom and started moving higher, and historically, motorists have been able to count on paying more for gasoline during the peak summer travel months than during the winter.
Meanwhile, the economy has remained relatively strong even in the face of what many see as a likely recession ahead. The latest report on employment showed that more than half a million jobs were created in January. More money in workers' pockets often leads to higher prices for the goods those workers want and need.
Based on what the past several months have shown, it's unlikely that the 2024 COLA will be anywhere near the 8.7% raise Social Security recipients just received. Those counting on Social Security will want to keep an eye on the CPI-W to see what happens in the months to come.
