Social Security recipients get an annual cost-of-living adjustment (COLA) to help protect the buying power of benefits from the effects of inflation. That protection mechanism has been especially crucial in recent years, as pandemic-era stimulus programs and loose monetary policy helped push U.S. inflation to a four-decade high in 2022.
One consequence of that unfortunate situation was an 8.7% COLA for recipients in 2023, the largest raise since 1982 and the fourth-largest raise since annual COLAs became law in 1975.
And that unusually large increase came on the heels of another unusually big increase: a 5.9% COLA in 2022, which also qualifies as one of the biggest in program history.
After two consecutive monster COLAs, many beneficiaries might be disappointed next year. The 2024 COLA is on pace to be much more modest, but it's important to put the situation in context.
Image source: Getty Images.
Social Security benefits will get a modest COLA in 2024
Social Security's COLAs are tied to inflation in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), a metric that tracks price changes over time across eight major spending groups: food and beverages, housing, apparel, transportation, medical care, recreation, education and communication, and other goods and services.
Here's how the math works: The third-quarter CPI-W (i.e., July through September) from any given year is divided by the third-quarter CPI-W from the previous year, and the percent increase (if any) becomes the COLA in the following year. For instance, the CPI-W increased 8.7% in the third quarter of 2022, so Social Security benefits got an 8.7% COLA in 2023.
The 2024 COLA cannot be finalized without September inflation data, which will be published in mid-October, but policy analyst Mary Johnson at the nonpartisan Senior Citizens League says data from July and August points to a 3.2% COLA next year.
The average COLA was 2.6% over the last 10 years
If Johnson is correct, the 3.2% COLA coming to Social Security next year will be the smallest that beneficiaries have seen since 2021. That probably makes some recipients nervous given that prices remain elevated across the economy, and CPI-W inflation actually reaccelerated in July and August. But a 3.2% COLA is still comfortably above the 10-year average of 2.6%.
The chart below shows how Social Security COLAs have trended over the last decade.
Chart by author.
That a 3.2% COLA would exceed the 10-year average might be little consolation to some beneficiaries, especially those now accustomed to receiving much larger raises. But there are certain benefits to a smaller cost-of-living increase that readers should consider.
First, Social Security COLAs are essentially compensation for buying power lost in the previous year. Larger COLAs are the result of rapid inflation, which causes benefits to lose buying power more quickly. But smaller COLAs are the result of slower inflation, which causes benefits to lose buying power less quickly.
From that perspective, a 3.2% COLA in 2024 would be a good thing because it means inflation is cooling.
Second, Social Security is facing a monument funding deficit, and the 8.7% COLA in 2023 made the problem worse. Specifically, the 2022 annual report from the Board of Trustees estimated that the Social Security trust fund would remain solvent until 2035, but that estimate was contingent upon a 3.8% COLA in 2023. When the actual COLA came in much higher, the trustees moved their timeline forward, saying the trust fund could now be depleted by 2034, meaning benefit cuts could happen one year earlier than expected.
The trustees expect the 2024 COLA to be 3.3%, and anything above that level could further accelerate the trust fund's depletion, theoretically bringing benefit cuts even closer. From that perspective, a 3.2% COLA in 2024 would be a good thing.
