Social Security's 2024 COLA: Retirees May Get a Smaller-Than-Expected Raise

Social Security benefits get an annual cost-of-living adjustment (COLA) to help retired workers and other recipients keep up with inflation. That aspect of the program has been critical in recent years. The scorching inflation that followed the COVID-19 pandemic led to a 5.9% COLA in 2022 and an 8.7% COLA in 2023, the two biggest raises beneficiaries have received in four decades.

However, inflation has cooled substantially in the past year due to aggressive action taken by the Federal Reserve, so Social Security recipients are on pace to get a much smaller raise next year. Indeed, economists and policy experts at Boston College, Morningstar, the Bipartisan Policy Center, and The Senior Citizens League expect Social Security's 2024 COLA to be 3%.

That estimate may be a tad optimistic. Here's why.

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Social Security's COLAs are tied to inflation

Annual COLAs protect Social Security benefits from the erosive effects of inflation, thus ensuring that beneficiaries are not losing buying power. The inflationary tether used in the COLA calculation is the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W, a metric that tracks how prices change over time from the perspective of hourly employees and office workers.

The Social Security Administration calculates annual COLAs by following these steps: The average CPI-W reading from July, August, and September in the current year (i.e., the third quarter) is divided by the average CPI-W reading from July, August, and September in the prior year. The output is rounded to the nearest tenth of a percent, and that percentage becomes the COLA in the following year.

For instance, the third-quarter CPI-W increased 5.9% in 2021, so Social Security benefits got a 5.9% COLA in 2022. Similarly, the third-quarter CPI-W soared 8.7% in 2022, so Social Security benefits got an 8.7% COLA in 2023.

Social Security COLA forecasts calling for a 3% raise may be overly optimistic

The chart below shows the CPI-W values pertinent to Social Security's 2024 COLA calculation. Readers should note that measurements for August and September of the current year are not yet available, so it is impossible to calculate the third-quarter CPI-W. In the meantime, I have simply used the CPI-W measurement from July as the quarterly average.

Data source: U.S. Bureau of Labor Statistics.

As shown above, Social Security benefits would get a 2.7% COLA next year if the CPI-W remains unchanged at 299.899 in August and September. For context, that implies a slight acceleration in CPI-W inflation from 2.6% in July to 2.8% in August and September. That means any analyst projecting a 3% COLA in 2024 must expect an even greater acceleration in CPI-W inflation.

Specifically, the CPI-W would need to increase 3.2% in August and September -- producing readings of 300.961 and 301.193, respectively -- for Social Security benefits to score a 3% COLA next year. While certainly plausible, that scenario seems improbable given that CPI-W inflation has trended sharply lower over the past year.

Of course, the Social Security Administration cannot finalize the 2024 COLA without inflation data from August and September. That means Social Security recipients won't know exactly how much benefits are increasing next year until Oct. 12. And a lot could happen between now and then, including a material reacceleration in inflation.

Nevertheless, retired workers and other recipients should mentally prepare themselves for a smaller-than-expected COLA next year. Rather than fixating on a specific figure, like 3%, it makes more sense to consider a range of possibilities.

For instance, the Committee for a Responsible Federal Budget says Social Security's 2024 COLA will fall between 2.6% and 3.3% in 2024, where the low end represents no change in CPI-W inflation and the high end represents an acceleration in CPI-W inflation. That forecast is the most sensible of the bunch because it incorporates multiple outcomes.