In June, more than 66 million people took home a Social Security benefit, 49.4 million of which are retired workers. For the lion's share of these retirees, Social Security income is a veritable necessity.
Over the past 22 years, national pollster Gallup has questioned retirees to gauge their reliance on this all-important program. Every year, between 80% and 90% of respondents have stated that their monthly check from America's top retirement program accounted for a "major" or "minor" source of income. In other words, senior poverty rates would be many multiples higher if Social Security didn't exist.
For all Social Security beneficiaries -- and especially retired workers -- the biggest day of the year is now less than two months away.
Image source: Getty Images.
Social Security's 2024 cost-of-living adjustment (COLA) is squarely in focus
On Oct. 12, 2023, the U.S. Bureau of Labor Statistics (BLS) will release the September inflation report and provide the final puzzle piece needed to calculate Social Security's annual cost-of-living adjustment (COLA). COLA is the "raise" beneficiaries receive most years that accounts for inflation. Effectively, it's a mechanism that attempts to ensure program recipients don't lose purchasing power over time.
Although I've previously covered the steps to calculate COLA in far greater detail, the simple gist is that the average reading of the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the third quarter (July September) of the current year is compared to the average CPI-W reading from the third quarter of the previous year. If the average third-quarter CPI-W reading rises from one year to the next, inflation has occurred and beneficiaries are due for a "raise."
Note, I keep putting "raise" in quotation marks to reflect that Social Security benefit increases are designed to match and not outpace the U.S. inflation rate, as measured by the CPI-W. This is different from a true raise you'd get from an employer that could actually outpace the rate of inflation.
In 2023, beneficiaries received a historically large benefit bump of 8.7%, which was reflective of a huge uptick in the U.S. inflation rate. The average retired worker saw their monthly check increase by $146 per month, which represents the biggest year-over-year nominal-dollar jump since Social Security's inception.
Next year, Social Security's COLA looks to be far more modest.
Here's what the average Social Security benefit should look like in 2024
Based on the July inflation report from the BLS, the all-encompassing U.S. inflation rate, as determined by the Consumer Price Index for All Urban Consumers (CPI-U), has tapered considerably. The CPI-U showed a 3.2% unadjusted increase over the trailing-12-month period.
US Inflation Rate data by YCharts.
However, core inflation remained stubbornly high at 4.7%. Core inflation removes the two most-volatile components from the equation -- food and energy expenses -- to provide a more consistent picture of price movements for a large basket of important goods and services. Based on resilient core inflation, The Senior Citizens League (TSCL), a nonpartisan senior issues advocacy group, estimated COLA would come in at 3% in 2024.
What would a 3% COLA actually look like for the average Social Security beneficiary and the key groups that comprise America's top program? Let's take a closer look.
If you account for all 66.63 million Social Security beneficiaries in June 2023, the average payout was $1,701.62. If we arbitrarily use this figure as the base from which a 3% COLA is added, the average Social Security benefit across the program should be $1,752,67 in 2024, or about $51 more than it is today.
While the percentage of the "raise" passed along to these 66.63 million beneficiaries is identical, the nominal-dollar bump can vary by category. For example, the average retired worker was taking home $1,837.29 in June. A 3% COLA set atop this figure would lift the average retired-worker benefit to $1,892.41 in 2024. That would be about $55 more per month for retired workers.
By comparison, roughly 7.5 million workers with disabilities were bringing home an average of $1,486.42 in June 2023, while 5.8 million aggregate survivor beneficiaries received an average of $1,451.85. A 3% COLA would lift the average payout in 2024 for workers with disabilities to $1,531.01 (just shy of $45 extra per month), while survivor beneficiaries would see their average 2024 benefit check increase to $1,495.41, or nearly $44 extra each month.
Image source: Getty Images.
Benefits may be heading higher, but purchasing power is decisively down
While there's no question that Social Security's more than 66 million beneficiaries will welcome a beefier payout in 2024, the reality for seniors is that Social Security's COLA has been doing them a disservice since the century began.
In May, TSCL compared the aggregate cost-of-living adjustments for Social Security since 2000 to the actual inflation for a basket of goods and services regularly purchased by seniors over the same timeline. Whereas Social Security's COLA has risen by 78% between January 2000 and February 2023, the typical cost of goods and services purchased by retirees has jumped 141.4% over the same span. In other words, the purchasing power of a Social Security dollar has declined by 36% since 2000 -- and an estimated 3% COLA in 2024 isn't going to help claw back these losses.
This persistent loss of purchasing power for retirees can be traced to the CPI-W. Though its introduction in 1975 was a big improvement over the arbitrary COLAs passed along by special sessions of Congress, the CPI-W fails to properly account for the spending categories that matter most to seniors.
Since the CPI-W tracks the spending habits of "urban wage earners and clerical workers," expenses such as apparel, education, and transportation, which matter to working-age Americans who likely aren't receiving a Social Security benefit, account for an outsized portion of the inflation calculation.
Comparatively, seniors make up well over 80% of Social Security's beneficiaries, yet are seeing truly important spending categories, such as shelter and medical care, somewhat marginalized in the inflation calculation. The end result is COLAs that aren't keeping up with the inflation seniors are truly contending with.
The real kick in the pants is that both of America's political parties agree that the CPI-W isn't doing a particularly good job of measuring inflation for Social Security's beneficiaries. Unfortunately, Democrats and Republicans have approached their fixes from opposite ends of the spectrum. With neither party willing to cede an inch to their opposition or find common ground, a solution to end this persistent loss of purchasing power remains elusive.
