We're still months away from knowing how big of a raise Social Security recipients will receive in 2024. But it's not too early to start thinking about it.
That's exactly what the Senior Citizens League has done. The nonpartisan group that advocates for seniors released a statement last week that estimated the Social Security cost-of-living adjustment (COLA) for next year could be 2.7%. Here's why that percentage could be too high.
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Slowing inflation
The Senior Citizens League said that inflation is the lowest it's been since March 2021. This observation was based on the latest consumer price data.
Social Security COLAs are calculated using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). In May, the CPI-W rose by 3.6% year over year.
Why didn't the Senior Citizens League use this 3.6% number as its estimate? The organization noted that inflation is continuing to slow.
The Federal Reserve seems to agree. In its latest meeting, the Fed commented that there are "lags with which monetary policy affects economic activity and inflation." The previous interest-rate hikes likely still haven't fully worked their way through the economy, which means that inflation could continue to decline.
No details of exactly how the Senior Citizens League arrived at its 2024 COLA estimate were provided. However, it appears that the group attempted to project how inflation could decline over the next few months, based on the current trend.
Too high?
A 2.7% adjustment would be much lower than the 8.7% COLA that retirees received this year. But that estimate might still be too high.
The Social Security Administration (SSA) doesn't use only one month to determine the COLA. Instead, the agency compares the average CPI-W for the third quarter against the average for the same period in the previous year.
Let's assume for a moment that inflation remains essentially unchanged from the May level through the end of the third quarter of 2023. If that happens, the COLA for next year would be close to 2.2%.
What if the Fed's rate hikes really kick in and inflation slows markedly over the coming months? Under this hypothetical scenario, the COLA for 2024 could be even lower than 2.2%.
The case for a higher COLA
A lower Social Security benefits increase than what the Senior Citizens League predicts is quite possible. However, there's a case that it should be higher.
An ongoing survey conducted by the organization found that seniors aren't seeing much improvement in their household costs so far. In particular, 62% of the respondents said food was their fastest-growing cost.
One big drawback of the CPI-W is that it doesn't reflect the costs of seniors as well as it could. An alternative metric called the Consumer Price Index for the Elderly (CPI-E) has been proposed that would address some of the issues with the CPI-W. So far, though, nothing has been done to incorporate it into the COLA calculation formula.
Any increase is better than nothing. But retirees might want to brace themselves for a disappointing Social Security benefits increase next year.
