Many retirees struggled financially in 2022 as inflation surged, driving up the cost of living across the board. But this year, seniors may be faring a bit better. That's because Social Security recipients got a giant raise at the start of 2023, and so far, it seems to be holding up nicely.
Social Security's most recent cost-of-living adjustment (COLA) was 8.7%. That was actually the largest raise to arrive in decades.
Of course, it was justifiable. Social Security COLAs are calculated based on changes in inflation. So while seniors no doubt had a difficult time keeping up with higher living costs in 2022, the silver lining was that high levels of inflation set the state for a large COLA in 2023.
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Meanwhile, the pace of annual inflation has been slowing since the start of 2023. And that means that seniors' current Social Security COLA may finally be helping them gain buying power compared to the previous year.
But next year's Social Security COLA could look very different from the raise that arrived in early 2023. And that's something seniors need to brace for.
Is your Social Security COLA going to shrink in 2024?
Social Security COLAs are calculated based on third quarter data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Last year, that index registered a high enough uptick in inflation that it allowed Social Security benefits to increase 8.7% this year.
But in March, the CPI-W was only up 4.5% on an annual basis. And if the index continues to register much lower levels of inflation this year, seniors on Social Security might end up very disappointed with their upcoming raise.
Of course, the flipside there would be relief from rampant inflation. And that's an important thing. But still, many seniors look to Social Security as their primary source of income. To follow up an 8.7% COLA with a much, much smaller one might seem like a blow.
Make the most of your higher paycheck
We won't know what 2024's Social Security COLA looks like until third quarter CPI-W data becomes available, so seniors will have to wait until October for that information to come out. But for now, Social Security recipients who don't need all of their benefits to cover essential living costs should try to bank some of that money. That way, if 2024's Social Security raise is overwhelmingly stingy, they'll have some cash reserves to fall back on.
Meanwhile, workers who are years away from retirement should make an effort to build up savings so they're not as reliant on Social Security once their careers wrap up. We don't know what Social Security COLAs will look like in the future, and they might end up leaving much to be desired.
In fact, there's a good chance Social Security will have to move forward with benefit cuts in a little over 10 years due to an impending funding shortfall. So saving more and relying less on Social Security is a good thing regardless of what future COLAs look like.
