Retirees claiming Social Security got a bigger-than-normal bump to their benefits this year thanks to the program's annual cost-of-living-adjustment (COLA), which is determined by inflation. Some of the highest levels of inflation seen in four decades during 2022 led to an 8.7% increase in benefits this year, which also happens to be the largest raise retirees have seen in about four decades.
This pushed the average monthly benefits check of retired workers up to nearly $1,835, or $22,020 annually, according to April data. With the year now approaching the halfway mark, let's take a look at how the COLA adjustment and potential raise is shaping up for Social Security retirees in 2024.
Calculating the COLA
As I mentioned, Social Security's annual COLA is based on inflation, but there is an actual method to the madness.
The Social Security Administration (SSA) calculates the COLA by looking at the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which tracks the prices of a market basket of consumer goods and services and is one way to gauge inflation. The SSA looks at the average CPI-W number in the third quarter of the year, which includes the months of July, August, and September.
Then the SSA compares the average CPI-W in the third quarter to the average CPI-W in the third quarter of the prior year. The percentage difference between these numbers is the following year's COLA, which is why inflation is the main driver of the COLA. There can be no negative COLAs.
For example, the average CPI-W in the third quarter of 2022 was roughly 291.9. In the third quarter of 2021, the average CPI-W was roughly 268.4, making the year-over-year increase 8.7%.
How are things trending?
We know from headlines that the rate of inflation has started to slow and is now down below 5%. In one regard, this is good for retirees in the sense that prices aren't growing as fast as they did last year, and retirees have higher benefits, which should help their purchasing power.
But it may not bode as well for their COLA in 2024. While it is not yet the third quarter, if we just look at the first five months of the year for the CPI-W, the difference between the monthly numbers this year and last year has started to shrink along with inflation.
In January, the CPI-W was up about 6.25% year over year. But in April, the most recent month the data is available, the CPI-W was up 4.6%.
And while it may not be a perfectly smooth line, inflation is expected to keep slowing as the Federal Reserve's intense interest rate hikes continue to work their way through and slow the economy. Most estimates from earlier this year expect inflation to dip below 4% and possibly to 3.5% or lower by the end of the year, and then reach the Fed's 2% target sometime in 2024.
What kind of raise can retirees expect?
Based on where inflation is right now and where it's expected to go, it seems quite possible that the COLA for 2024 ends up in the 3.5% to 4.5% range. However, the nonpartisan Senior Citizens League believes next year's raise could be much lower, potentially 2% or less. The Senior Citizens League apparently came up with this projection by looking at the 12-month average rate for CPI-W.
The SCL estimate certainly seems low right now, but it's hard to know the exact impact all the Fed's rate hikes will have on inflation -- it could decline faster than experts expect. Regardless, as things stand now, it's quite possible Social Security retirees could be looking at a COLA in 2024 of less than half of this year's 8.7% increase.