For most retired Americans, Social Security isn't just some check that comes in the mail or is deposited into their checking account once monthly. Rather, it's a vital source of income that helps seniors make ends meet. The program is responsible for pulling nearly 22.5 million people out of poverty each year, 16.1 million of which are adults aged 65 and over. Further, since 2002, at least 80% of surveyed retirees have told national pollster Gallup that their Social Security benefit is a "major" or "minor" source of income.
Because of the important role Social Security plays in the financial well-being of seniors during retirement, there's arguably no event more anticipated than the program's annual cost-of-living adjustment (COLA) announcement during the second week of October.
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Here's how your Social Security "raise" is calculated
Social Security's COLA is the "raise" the program passes along to beneficiaries most years to account for inflation -- the rising price of goods and services. Note: "Raise" is in quotation marks to represent that this is an increase in benefits designed to match the rate of inflation and not to outpace it, which could happen with a more traditional raise from an employer.
Prior to 1975, Social Security's COLA was assigned at random by special sessions of Congress. Thankfully, the program has had a more consistent inflationary tether since then with the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W has a handful of major spending categories and a laundry list of subcategories, each with its own respective percentage weighting. These weightings are what allow the CPI-W to be whittled down to a single number, which can then be easily compared to the previous month or year to determine whether inflation or deflation (falling prices) is taking place.
Although the U.S. Bureau of Labor Statistics reports the CPI-W monthly, only readings from the third quarter (July through September) factor into Social Security's COLA calculation. While the other months can help identify trends with pricing, they have no impact on the "raise" Social Security's more than 66 million beneficiaries would receive in 2024.
U.S. Inflation Rate data by YCharts.
An early read on Social Security's 2024 COLA isn't encouraging
For the program's nearly 49 million retired workers, Social Security's COLA for the current year was historically high. The 8.7% "raise" they received represents the largest year-over-year percentage increase in benefits in 41 years and is the biggest nominal-dollar boost since the program was signed into law.
Unfortunately, Social Security's 2024 COLA doesn't look as if it'll be a repeat of 2023 -- or even close, for that matter.
According to a very early prognostication sent in an email to CBS MoneyWatch from Mary Johnson, a senior Social Security policy analyst at The Senior Citizens League (TSCL), "[T]he [2024] COLA look like it will be below 3% and could fall into the 2% or even lower range by the third quarter if that 12-month average [for the CPI-W] continues to decline."
Whereas the average retiree enjoyed a hearty $146 increase to their monthly Social Security check in 2023, a roughly 2% to 3% COLA would equate to a more modest $37 to $55 boost per check in 2024.
Between June 2022 and February 2023, the trailing-12-month rate of inflation, as measured by the Consumer Price Index for All Urban Consumers (CPI-U), has declined from a peak of 9.1% to 6% and is expected to continue falling. The Federal Reserve increasing interest rates at the fastest pace in more than four decades, along with oil prices backing well off their 2022 highs, is the perfect storm for a significant drop in the U.S. inflation rate, as well as a much lower Social Security COLA next year.
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A potentially disappointing 2024 "raise" is only half the concern for retirees
However, a substantially lower "raise" in 2024, compared to this year, is only part of the problem for seniors who rely on their Social Security checks to cover their expenses. The more encompassing issue is that the CPI-W doesn't do a particularly good job of measuring inflation for the bulk of the program's recipients.
At its core, the CPI-W tracks the spending habits of "urban wage earners and clerical workers," as its full name states. The thing is, urban wage earners and clerical workers are typically working-age Americans who aren't receiving a Social Security benefit. Since most Social Security beneficiaries are seniors, the CPI-W has a tendency to underweight expenses that account for a larger percentage of their spending, such as medical care and shelter, while overweighting expenditures that aren't as important, like education, apparel, and transportation.
Based on a report released by TSCL last year, the purchasing power of a Social Security dollar has declined by an almost unfathomable 40% since 2000. What $100 in Social Security income could buy in 2000 can now only purchase $60 worth of those same goods and services.
Perhaps the most frustrating aspect of the CPI-W's shortcomings is that lawmakers from both parties are aware they exist, and they agree something should be done. However, Democrats and Republicans are approaching a fix from opposite ends of the spectrum and therefore haven't been able to find any common ground. Since bipartisan cooperation is required to reach the 60 votes needed to amend Social Security in the Senate, it's unlikely we'll see this Social Security deficiency tackled anytime soon.
