The 8.7% Social Security raise seniors got at the start of 2023 has no doubt helped many retirees stay afloat and keep up with their living costs as inflation has continued to surge. That 8.7% cost-of-living adjustment, or COLA, was the largest to come down the pike in decades, well surpassing the 5.9% COLA seniors received at the beginning of 2022.
But while this year's COLA may be helping seniors on Social Security regain their financial footing, next year's raise might look very different. In fact, it has the potential to be negligible, or even nonexistent.
It's a matter of inflation
Many seniors routinely rely on Social Security to cover the bulk of their bills. And for some, those benefits are their only source of income. As such, many recipients depend on generous COLAs to maintain their buying power in retirement.
Image source: Getty Images.
For many years, those COLAs have disappointed. And come 2024, seniors on Social Security might land in a similar boat.
The reason? Social Security COLAs are based on changes in inflation, as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), a subset of the more broadly tracked Consumer Price Index.
Specifically, third-quarter CPI data is aggregated every year and compared to third-quarter data from a year prior. If the rate of inflation rises on an annual basis, Social Security benefits go up. If the rate of inflation slows down, Social Security's COLA follows suit.
Meanwhile, inflation has cooled this year since peaking in mid-2022. And while we don't know what the next number of months have in store, there's a good chance we'll be looking at a much lower level of inflation during the third quarter of 2023 than in 2022.
In many regards, that's a good thing. Higher living costs have been putting a strain on consumers of all ages. They've been burdening retirees, hurting workers, and forcing many people to halt retirement plan contributions.
On the other hand, a slowdown in inflation could lead to a minimal Social Security COLA in 2024 -- or potentially no COLA at all. And that's a possibility seniors need to brace for.
Of course, the good news is that Social Security recipients can't see their benefits go down from one year to the next. This holds true even if Medicare premium rate hikes outpace their COLA. But still, given how generous this year's Social Security raise was, many seniors are no doubt hoping for a repeat in 2024. Those who don't keep tabs on inflation data, however, may be in for a rude awakening.
Save that money now
It's too soon to tell what a 2024 Social Security COLA will look like. The Social Security Administration commonly makes that information available in October, once third-quarter CPI-W data is complete. But seniors who are sitting on extra cash right now should take the opportunity to bank at least some of it. That way, if next year's COLA disappoints, they'll have some reserves to tap if money begins to get tight.
