Whether you're just entering the workforce or you hung up your work coat years ago, there's a very good chance that Social Security will play, or is already playing, an important role in your retirement.
For more than two decades, national pollster Gallup has been surveying retirees and non-retirees to gauge their current or expected reliance on Social Security income to make ends meet. For retirees, no fewer than 80% of respondents lean on their monthly benefit as a "major" or "minor" source of income. Meanwhile, anywhere from 76% to 88% of future retirees anticipate counting on their Social Security income, to some degree, to cover their expenses.
Given the crucial role Social Security income plays for most Americans, there's no event that's more anticipated than the annual cost-of-living adjustment (COLA) announcement, which is now just 18 days away (Oct. 12, 2023).
Image source: Getty Images.
What is Social Security's cost-of-living adjustment, and how is it calculated?
What COLA represents is the increase in benefits passed along most years to account for the inflation beneficiaries have faced. In other words, if the price for goods and services rises, Social Security benefits should increase, too -- and preferably by the same percentage as the prevailing rate of inflation to avoid beneficiaries losing purchasing power.
Since 1975, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) has been tasked with tracking price movements in a large basket of goods and services for Social Security. The CPI-W has eight major spending categories, most of which have dozens upon dozens of subcategories, all with their own respective weightings. These weightings allow the CPI-W to be whittled down to a single number each month, which can then be compared to the previous month or year to determine whether prices, as a whole, are rising or falling.
However, calculating Social Security's COLA doesn't involve taking a full years' worth of CPI-W readings into account. Rather, only readings from the third quarter (July through September) are used. If the average third-quarter CPI-W reading from the current year is higher than the average third-quarter CPI-W reading from the previous year, it means prices, as a whole, have gone up. It also means Social Security checks will move higher in the upcoming year.
The benefit increase Social Security beneficiaries receive is simply the percentage difference in the average third-quarter CPI-W readings from one year to the next, rounded to the nearest tenth of a percent.
A more than four-decade high in inflation sent Social Security's COLA soaring in 2023. US Inflation Rate data by YCharts.
Who's ready for a bigger Social Security check?
In 2023, beneficiaries received a historically high cost-of-living adjustment from Social Security. On the heels of the highest rate of inflation in the U.S. in more than 40 years, the 8.7% COLA that was passed along this year increased the average retired-worker benefit by $146 per month. On a nominal-dollar basis, it's the largest increase since retired-worker payouts began in January 1940.
The $64,000 question is: What can Social Security's nearly 67 million beneficiaries expect for 2024?
According to senior Social Security policy analyst Mary Johnson at The Senior Citizens League (TSCL), a nonpartisan senior advocacy group, retirees can expect an above-average boost to their monthly check next year.
Following the Sept. 13 release of the August inflation report from the U.S. Bureau of Labor Statistics, Johnson increased her forecast for Social Security's COLA to 3.2% in 2024. That's up from an estimated 3% boost following both the June and July inflation reports. Although a 3.2% COLA is a far cry from the 8.7% bump beneficiaries received this year, it's still modestly higher than the 2.6% average COLA over the past 20 years.
What would a 3.2% COLA look like in dollar terms for the nearly 50 million retired workers currently receiving a monthly benefit? Based on an average payout of $1,840.27 in August, a 3.2% COLA would lead to about a $59 increase each month, beginning in 2024. A roughly $1,899/mo. benefit would work out to $22,788 per year in benefits for the average retired worker.
Of course, it's not just retired workers that receive Social Security's COLA. The nearly 7.5 million workers with long-term disabilities and 5.8 million survivor beneficiaries would see their payouts rise, too. The average worker with disabilities would have their monthly benefit grow by just shy of $48 to around $1,534, while the average survivor beneficiary would receive close to $47 extra per month, lifting their monthly payout to about $1,501.
Image source: Getty Images.
Retirees could face a double whammy in 2024
Considering that there's been no COLA three times since 2009, and another year resulted in the lowest positive COLA in history (0.3% for 2017), an expected 3.2% COLA for 2024 would appear to be a bright spot for the program's many beneficiaries. But looks can be deceiving.
The biggest issue for the 86% of Social Security beneficiaries who are aged 62 and above is that the CPI-W is doing an, arguably, terrible job of accounting for the inflation they're contending with.
As its full name implies, the CPI-W is focused on the spending habits of "urban wage earners and clerical workers." These are usually working-age Americans who aren't receiving a Social Security benefit. More importantly, they're going to spend their money very differently than senior citizens. Whereas shelter and medical care represent a higher percentage of total expenditures for seniors than the typical working-age American, urban wage earners and clerical workers will spend more on things like apparel, education, and transportation (i.e., categories that matter far less to retirees).
The end result is that CPI-W is underweighting important spending for seniors and costing them purchasing power over time. According to TSCL, the purchasing power of Social Security income has declined by 36% since January 2000. .
If this persistent loss of purchasing power wasn't enough, a number of retirees could face a double whammy in 2024 because of Medicare Part B premiums. Part B is the segment of Medicare that covers outpatient services.
This year, Medicare Part B premiums actually declined! It's only the second time this century Part B premiums have fallen on a year-over-year basis. But in 2024, they'll most definitely be climbing. The U.S. Food and Drug Administration's approval of Alzheimer's drug Leqembi, which sports a hefty $26,500 annual price tag, along with a number of other pricey therapies, could cause Part B premiums to rise between $10 and $15 per month in 2024. For lifetime low-earning retirees, their 3.2% COLA could be completely eaten up by an increase in Part B premiums.
Although an above-average COLA does appear to be on the way, not all retirees are going to benefit.
