For a majority of the more than 49 million retired workers who receive a Social Security check each month, this payout is an absolute necessity. Over the past 20 years, national pollster Gallup has conducted annual surveys and found that between 80% and 90% of retired workers lean on their monthly benefit check to some degree to make ends meet.
Considering how important Social Security income is for seniors during their golden years, it should come as no surprise that the annual cost-of-living adjustment (COLA) is the most anticipated Social Security announcement each year.
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Social Security's COLA puts more money in your pocket if prices rise
Social Security's COLA is the payout adjustment beneficiaries receive most years to account for inflation. In other words, if the price for goods and services increases from one year to the next, Social Security should, ideally, increase benefit checks by roughly the same amount. This way recipients wouldn't lose their purchasing power over time.
Before 1975, cost-of-living adjustments were completely arbitrary and passed by special sessions of Congress. Between the first retirement benefit check being mailed out on Jan. 1, 1940 and Dec. 31, 1974, there were just 11 COLAs. In fact, the entire 1940s passed without a single payout adjustment for inflation.
Since 1975, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) has been the financial yardstick by which Social Security's annual inflation is measured. The CPI-W (thank goodness for acronyms!) has more than a half-dozen major spending categories and dozens upon dozens of subcategories, each with their own respective percentage weightings. These weightings allow the CPI-W to be whittled down to a single figure at the end of each month, which makes for clean comparisons to previous months or years to determine if inflation or deflation (falling prices) has taken place.
Although the CPI-W is reported monthly by the U.S. Bureau of Labor Statistics (BLS), only CPI-W readings from the third quarter (July-September) matter when calculating Social Security's cost-of-living adjustment. If the average Q3 CPI-W reading from the current year is higher than the average Q3 CPI-W reading from the previous year, prices have risen and beneficiaries are due a COLA in the upcoming year. If the CPI-W declines year over year, which has only occurred three times since 1975, Social Security benefits remain unchanged.
Here's the day tens of millions of Social Security beneficiaries are waiting for
The BLS makes its inflation reports public during the second week of each month. According to the BLS release schedule, the most important day of the year for Social Security will occur on Thursday, Oct. 12, 2023, at 8:30 a.m., ET. In other words, have the coffee pot handy, especially if you live on the West Coast.
Why October? As noted, readings from the third quarter are what matter for Social Security's COLA calculation. It takes the BLS a week and some change to aggregate and tabulate its data from September, which results in the annual release during the second week of October.
Now that you know when the announcement that affects the payouts of more than 66 million beneficiaries -- that's retired workers, survivors, and disabled workers -- will be made, the question then becomes: "How big a 'raise' will it be?" Note, "raise" is in quotation marks to reflect that it's a benefit adjustment to match the inflation rate and not outpace it.
US Inflation Rate data by YCharts.
This year, beneficiaries are enjoying a truly historic boost to their monthly benefit. The 8.7% cost-of-living adjustment they received marks the biggest year-over-year percentage increase in 41 years, as well as the largest nominal-dollar boost in history. The average retired worker saw their monthly check grow by $146.
But there's a reason 2023's COLA was so high: Inflation. Following years of dovish monetary policy from the Federal Reserve, the price for everything from food to fuel soared. Based on current Consumer Price Index trends, 2024 won't be a repeat.
Whereas the Consumer Price Index for All Urban Consumers (CPI-U) peaked at 9.1% in June 2022, it came in at a more modest 4.9% for April 2023. The CPI-U is a similar measure to the CPI-W. It should be noted that the CPI-W rose by an even tamer 4.6% over the last 12 months, as of April 2023.
The primary culprit for this year-over-year decline is energy prices. With crude oil and natural gas well off their highs, everything from electricity to fuel at the pump has fallen considerably.
However, the core inflation rate, which excludes food and energy, was higher by a stubborn 5.5% in April 2023 over the trailing 12-month period. Inflationary trends have led Social Security policy analyst Mary Johnson of The Senior Citizens League (TSCL) to predict a 2024 COLA of 3.1%. For the average retired worker, we're talking about an expected "raise" of $57 to their monthly benefit check next year.
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Cost-of-living adjustments have been failing beneficiaries for decades
On the bright side, there's a good chance Social Security's more than 66 million beneficiaries will see their payouts increase in 2024. On the downside, the program's annual COLAs haven't done a very good job of keeping pace with the actual rate of inflation for more than two decades.
How does an inflationary index fail to accurately do its job? The answer can be seen in the full name of the CPI-W: Consumer Price Index for Urban Wage Earners and Clerical Workers. Urban wage earners and clerical workers are usually working-age Americans, and they typically aren't receiving a Social Security benefit.
The big issue is that the CPI-W is tracking the spending habits of these urban wage earners and clerical workers and using this data as the basis for adjusting the program's COLA. However, the vast majority of Social Security's recipients are senior citizens. Seniors and "urban wage earners and clerical workers" have different spending habits.
For seniors, a larger percentage of their monthly expenditures is devoted to medical care and shelter than the average American's. But given the CPI-W's focus, shelter and medical care aren't being given any added weighting, while less important expenses, such as education and transportation, are seeing their effects on COLA magnified.
According to TSCL, the aggregate purchasing power of Social Security income has plunged 36% between 2000 and 2023. What $100 in Social Security benefits could have purchased a retired worker at the beginning of the century can now only buy $64 worth of those same goods and services.
Without bipartisan cooperation in Congress to replace the CPI-W as the program's inflationary tether, Social Security's beneficiaries are liable to see their purchasing power continue to erode over time.
