Last year, fallout from the pandemic drove inflation to a four-decade high, and the rising cost of rent, groceries, and monthly utilities put many people in a difficult financial position. More than half of Americans dipped into their savings accounts to cover everyday expenses, and some families even reported skipping meals to make ends meet.
Not surprisingly, financial headwinds left some retired workers in a particularly unpleasant spot. Trillions of dollars disappeared from retirement accounts as the stock market plummeted, and the buying power of Social Security benefits declined as prices increased across the economy. The only silver lining was the historic cost-of-living adjustment (COLA) applied to Social Security payments this year.
To offset inflation, Social Security benefits got an 8.7% COLA in 2023, the biggest raise for retired workers since 1982 and the fourth biggest raise in history. Can retired workers expect another big COLA in 2024?
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How Social Security's COLAs are calculated
Inflation causes money to lose purchasing power over time. In other words, $20 will buy fewer goods and services today than it did a few years ago, and far fewer goods and services than it did a few decades ago. Annual COLAs are intended to preserve the buying power of Social Security payments by keeping benefits aligned with inflation.
There is some debate about whether those annual COLAs have actually kept pace with rising prices, but that relates to the variable used to measure inflation. Currently, COLAs are calculated based on changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), but certain experts believe the CPI-W actually underestimates the effect of inflation on the senior population. Some lawmakers have even proposed calculating COLAs using an alternative metric known as the Consumer Price Index for the Elderly (CPI-E).
Regardless, retired workers should understand how COLAs are calculated under current law. The CPI-W from the third quarter of the current year is divided by the CPI-W from the third quarter of the prior year, and the percent increase (if any) becomes the COLA for the following year. For example, the CPI-W increased 8.7% in Q3 2022, so an 8.7% COLA was applied to Social Security benefits in 2023.
Q3 runs from July through September, which means the CPI-W data needed to calculate the 2024 COLA is not yet available. But retired workers can get a sense of the 2024 COLA by comparing CPI-W data from the last three months to CPI-W data from Q3 2022.
Social Security benefits will probably get a smaller COLA in 2024
The average CPI-W reading over the last three months was 296.296, which represents a 1.5% increase compared to the average CPI-W reading from Q3 2022. Of course, while inflation has decelerated sharply over the past year, the CPI-W will most likely continue to climb in the coming months. That means the 2024 COLA should be no smaller than 1.5%, but the odds of another 8.7% COLA are virtually nonexistent.
Indeed, The Senior Citizens League's policy analyst Mary Johnson estimates retired workers will receive a 3.1% COLA next year. Some readers may be disappointed by that information, but a smaller COLA means inflation is falling, and that is ultimately a good thing. That said, the official 2024 COLA won't be announced until October 2023, and no one knows what inflation will do in the coming months, so retired workers should never treat early COLA estimates as fact.
