In June, more than 49 million retired workers collected a Social Security check that averaged $1,837.29, according to the Social Security Administration. This may not sound like a big payday, but the monthly benefits received by eligible beneficiaries help to pull more than 15.3 million seniors aged 65 and over out of poverty each year.
More than two decades of annual surveys by national pollster Gallup find that between 80% and 90% of current retirees (at the time of the survey) rely on their Social Security income in some capacity to cover their expenses.
With so many Americans counting on Social Security to provide a financial foundation, it should come as no surprise that the program's annual cost-of-living adjustment (COLA), reported during the second week of October, is a highly awaited event each year. Based on early data, Social Security's 2024 COLA is shaping up to be something of a good news/bad news scenario.
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The nuts and bolts of what Social Security's COLA is, and how it's calculated
Put simply, Social Security's cost-of-living adjustment is the "raise" beneficiaries receive in the upcoming year that accounts for the inflation they've contended with. If the price increases for the goods and services Social Security recipients buy, ideally, benefits should rise by a commensurate amount to ensure they don't lose purchasing power. COLA is the mechanism that passes along these "raises" most years.
Note, I'm putting "raise" in quotation marks to signify that it's an increase in benefits designed to match the prevailing rate of inflation. It's not the same as a raise an employee would receive, which has the potential to outpace the inflation rate.
For the past 48 years, Social Security's COLA has been determined annually by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W has a handful of major spending categories and many subcategories, all of which have respective weightings attached. These weightings allow the CPI-W to be reported as a single number each month, which makes for neat and tidy comparisons to the previous month or year to determine if prices are rising (inflation) or falling (deflation) for a broad basket of goods and services.
What's unique about Social Security is that only the CPI-W readings from the third quarter (July through September) factor into the COLA calculation. While the other nine months of readings can be helpful in identifying trends, the October through June CPI-W readings have no effect on the "raise," or lack thereof, passed along to beneficiaries in the upcoming year.
Calculating Social Security's COLA for the following year involves taking the average CPI-W reading from the third quarter (Q3) of the current year and comparing it to the average CPI-W reading from Q3 of the previous year. If it's risen, beneficiaries are due a "raise" that's equal to the percentage difference year over year, rounded to the nearest tenth of a percent.
Historically high inflation in 2022 helped fuel the largest COLA for Social Security recipients since 1982. US Inflation Rate data by YCharts.
Good and bad news awaits Social Security beneficiaries in 2024
In 2023, the program's more than 66 million beneficiaries received the biggest cost-of-living adjustment in 41 years (8.7%), as well as the largest year-over-year nominal-dollar increase in Social Security's storied history. However, 2024 is looking markedly different. While there is a silver lining for retirees, there also looks to be some unwelcome news.
On the plus side, Social Security's cost-of-living adjustment may come in a bit higher than initially expected. Last month, The Senior Citizens League (TSCL), a nonprofit senior issues advocacy group, forecast that Social Security's 2024 COLA would come in at 2.7%. But following the release of the June inflation data by the Bureau of Labor Statistics, TSCL is now predicting a 2024 COLA of 3%.
Interestingly, this upward revision in TSCL's 2024 Social Security COLA forecast comes as the prevailing inflation rate, as measured by the CPI-W, was just 2.3% in June. That's its lowest trailing 12-month (TTM) increase in more than a year. Stubbornly high core inflation, which removes volatile food and energy expenses from the equation, may be the culprit. Core inflation for the Consumer Price Index for All Urban Consumers (CPI-U) jumped 4.8% on a TTM basis.
If TSCL's upwardly revised estimate proves accurate, a 3% cost-of-living adjustment in 2024 would add $55 per month to the average retired worker's Social Security check. Meanwhile, the average worker with disabilities and average survivor beneficiary would see their payouts rise by nearly $45/month and $44/month, respectively, next year.
But there's a downside as well. Although Social Security's 2024 "raise" could be a bit larger than first anticipated, a substantial percentage of recipients could see zero or little net benefit thanks to a sizable uptick in Medicare Part B premiums. Medicare Part B is the segment of the Medicare program responsible for outpatient services. Monthly premiums for Part B are automatically deducted for most Social Security recipients.
On March 31, 2023, the Medicare Trustees Report forecast an increase in Part B premiums, from $164.90/month in 2023 to $174.80/month in 2024. Note, Part B premiums actually declined in 2023, which marked only the second time this century that's happened. But due to the rising cost of brand-name therapeutics, Part B premiums tend to rise most years.
A roughly $10/month forecast increase in Part B premiums in 2024 would wipe out or substantially offset the nominal-dollar "raise" many Social Security beneficiaries are set to receive.
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Losing purchasing power is becoming all too common for Social Security beneficiaries
Unfortunately, Social Security beneficiaries losing their purchasing power to inflation isn't abnormal. In fact, it's become something of an expectation since the start of the century.
To be fair, the CPI-W measuring annual inflationary increases since 1975 has been a blessing compared to the arbitrary COLAs that were passed along by special sessions of Congress between 1950 and 1974. However, the CPI-W isn't accurately accounting for the inflationary pressures most recipients are dealing with.
How does an inflationary tether with a large predetermined basket of goods and services fail to accurately measure inflation? The answer lies with its full name: the Consumer Price Index for Urban Wage Earners and Clerical Workers. The CPI-W is designed to track the spending habits of mostly working-age Americans who aren't receiving a Social Security benefit. By comparison, well over 80% of Social Security's more than 66 million beneficiaries are aged 62 and over.
The average working-age American and seniors spend their money very differently. Whereas medical care and shelter represent a considerably higher percentage of total expenditures for seniors, urban wage earners and clerical workers are likely to spend more on categories such as apparel, education, and transportation, which frankly aren't that important for senior households. Having an inflationary tether that isn't focused on the spending habits of seniors is hurting annual COLAs.
Between January 2000 and February 2023, Social Security's aggregate annual cost-of-living adjustments have increased benefits by approximately 78%. Comparatively, TSCL found that the cost of a basket of goods and services typically purchased by retirees rose by more than 141% over the same stretch. All told, the purchasing power of Social Security income has declined by 36% since 2000.
Nothing short of bipartisan cooperation in Congress can remedy this ongoing loss of purchasing power for retirees receiving a Social Security benefit.
