Seniors who get most or all of their income from Social Security often struggle to make ends meet. That's because those benefits will generally replace about 40% of the typical senior's pre-retirement income, which isn't a lot. Many seniors wind up needing more like 70% to 80% of their former earnings to live comfortably.
But this year, Social Security recipients were thrown a bone in the form of an 8.7% cost-of-living adjustment, or COLA. That raise was the largest Social Security increase to come through in decades, and it's no doubt helped many seniors regain a bit of buying power.
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What made 2023's Social Security COLA even more helpful was that the cost of Medicare Part B didn't rise simultaneously. When Part B premiums go up, that increase eats away at Social Security raises. But since seniors didn't have to deal with that in 2023, many have no doubt been able to maximize their 8.7% COLA.
While 2023's Social Security raise was certainly one for the record books, 2024's COLA is looking like it will be a lot smaller. And that's something beneficiaries should prepare for.
Seniors should gear up for a much lower raise next year
Social Security COLAs are based on inflation. And thankfully, inflation has cooled notably since peaking in mid-2022.
On the one hand, that's great news not just for retirees, but also for all consumers. But cooling inflation also means that seniors won't get as much of a boost to their Social Security benefits next year as they did this year or the year before.
Based on the latest inflation data, the nonpartisan Senior Citizens League is projecting that 2024's COLA could amount to just 2.7%. That's a far cry from the 8.7% boost that came through this past January.
The big announcement happens in October
Social Security COLAs are specifically calculated based on third-quarter data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), a subset of the broader Consumer Price Index. Since we haven't yet reached the third quarter of the year, it's too soon to say with certainty what next year's COLA will look like.
However, in May, the CPI-W increased just 3.6% on an annual basis. If the index keeps dipping, Social Security recipients could end up with a pretty small boost in 2024.
Of course, the big wild card in all this will be Medicare -- specifically, the extent to which the cost of Part B premiums go up. If seniors wind up with a small COLA coupled with a large Medicare hike, a lot of Social Security recipients could wind up in a tough position next year.
Ultimately, Social Security beneficiaries will need to sit tight until October to see what happens with their upcoming COLAs. But those who aren't spending down their benefits in full these days may want to consider banking some of that extra money in case their finances get tighter in 2024.
