Inflation has been cooling nicely since peaking in mid-2022. While that's a good thing for consumers, including retirees on fixed incomes, it could also set the stage for a much lower Social Security cost-of-living adjustment, or COLA, in 2024.
COLAs are pegged directly to changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Surging inflation in 2022 led to a generous 8.7% Social Security COLA in 2023. But based on more recent inflation readings, next year's COLA is looking to be somewhere in the ballpark of 3%.
We won't know what 2024's COLA will be until October. That's because that raise will hinge specifically on what the CPI-W does during the third quarter of the year. But unless inflation soars unexpectedly in August and September -- an unlikely event in light of the Federal Reserve's most recent interest-rate hike -- seniors on Social Security should expect their benefits to rise only modestly once the new year begins.
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It's not just inflation that could lead to seniors on Social Security winding up with a lackluster raise. Increases in the cost of Medicare might also eat away at next year's COLA, leaving seniors to struggle.
Medicare hikes are a strong possibility
In 2023, the cost of Medicare Part B went down for the first time in years. That, combined with a massive COLA, gave seniors on Social Security a nice boost to their monthly paychecks. Part B premiums are deducted from benefits automatically for seniors who are enrolled in Social Security and Medicare at the same time.
Next year, the cost of Medicare has the potential to rise thanks to Leqembi, a new treatment for Alzheimer's disease that recently hit the market. The Kaiser Family Foundation projects that Leqembi could end up being the third most-covered drug by Medicare.
But that could drive the cost of Part B way up in the near term. In fact, it's estimated that Leqembi alone could add $5 a month to Medicare Part B premiums.
Meanwhile, the Medicare trustees predicted earlier this year that the standard monthly cost of Part B would rise to $174.80 in 2024, up from $164.90. The nonpartisan The Senior Citizens League thinks the standard Part B premium will come in at $179.80 per month, resulting in about a $15 increase for most enrollees.
Prepare for a much smaller COLA
While it's still too early to predict what 2024's Social Security COLA will look like, it's more than fair to assume that it will be considerably smaller than the raise seniors got at the start of 2023. So it's best for Social Security recipients to prepare for that by socking away extra funds now when they can.
The reality is that smaller Social Security COLAs aren't necessarily a terrible thing, as they're often indicative of low or moderate levels of inflation. It's the Medicare component that's a bit more of a wild card and a bit more troublesome.
