The most important day of the year for the more than 66 million people who receive a Social Security benefit each month is nearly here. This coming Thursday, Oct. 12, 2023, at 08:30, a.m., ET, the Social Security Administration (SSA) will announce the 2024 cost-of-living adjustment (COLA).
Given that between 80% and 90% of current retirees lean on their monthly payout to cover at least some portion of their monthly expenses, any announcement that pertains to a potential beefier monthly check is going to command attention.
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What's the purpose of Social Security's COLA and how is it calculated?
Social Security's COLA is the mechanism by which benefits are adjusted to account for inflation. Put another way, if the price for the goods and services that the programs' more than 66 million recipients regularly buy increases, benefits should rise by a commensurate amount to ensure no loss of purchasing power. COLA is the tool responsible for measuring and determining annual benefit increases most years.
From the first Social Security check being issued in January 1940 through 1974, Social Security's COLAs were arbitrarily determined by special sessions of Congress. Since 1975, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) has served as the inflationary tether.
The CPI-W has eight major spending categories, along with dozens upon dozens of subcategories, all of which have their own respective weightings. The purpose of these weightings is to allow the monthly reported CPI-W to be whittled down to a single figure, which can then be easily compared to the previous month or year-ago reading to determine whether inflation (rising prices) or deflation (falling prices) has occurred.
The quirk for Social Security is that only CPI-W readings from the third quarter (we're talking about July through September) factor into the COLA calculation. Since the U.S. Bureau of Labor Statistics doesn't release the September inflation report until 08:30 a.m., ET, on Oct. 12 -- i.e., the final puzzle piece needed to calculate the cost-of-living adjustment -- the SSA can't announce the 2024 COLA until that time.
If the average CPI-W reading from the third quarter (Q3) of the current year is higher than the average CPI-W reading from Q3 of the previous year, it means inflation has occurred and Social Security checks will increase in the upcoming year. The amount of the benefit boost is the year-over-year percentage difference between the two Q3 CPI-W readings, rounded to the nearest tenth of a percent.
Historically high inflation sent Social Security's COLA soaring in 2023. US Inflation Rate data by YCharts.
Expect an above-average cost-of-living adjustment in 2023
In 2023, program beneficiaries have enjoyed one of the most robust cost-of-living adjustments since the CPI-W became the inflationary tether 48 years ago. This years' 8.7% COLA was the largest year-over-year percentage increase in 41 years. Meanwhile, the average retired-worker saw their Social Security check increase by $146 per month, which represents the largest year-over-year nominal-dollar boost in the programs' history.
Suffice it to say, the 2024 Social Security COLA isn't going to be anywhere close to 8.7%. It will, however, be an above-average boost to benefits.
According to the latest estimate from Mary Johnson, senior Social Security policy analyst at The Senior Citizens League (TSCL), a nonpartisan senior advocacy group focused on advancing issues important to seniors, the program's COLA is expected to hit 3.2% for 2024. Over the past 20 years, Social Security's COLA has averaged just 2.6%.
Although the broad-based inflation rate for the U.S. has fallen well off of its June 2022 high of 9.1%, a few hot spots remain. Energy prices have soared in recent months, which may provide a boost to the soon-to-be-announced 2024 COLA.
Likewise, shelter inflation -- rental costs and/or the value a house could be rented out right now -- has remained stubbornly high. Shelter is the largest weighted component of the broad-based Consumer Price Index for All Urban Consumers (CPI-U) and the CPI-W. With mortgage rates soaring to their highest level in more than two decades, landlords are enjoying plenty of pricing power.
For the nearly 50 million retired workers collecting a Social Security check each month, a 3.2% COLA would increase their monthly payout by roughly $59 to $1,899 per month. Meanwhile, workers with disabilities and survivor beneficiaries would be expected to see their monthly checks rise by $48 and $47, respectively, in 2024.
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Bad news: There's no silver lining in Social Security's 2024 COLA
With four of the past 15 years resulting in either no COLA or a historically low 0.3% COLA, a 3.2% increase to Social Security checks in 2024 will look good on paper. Unfortunately, next year's COLA won't have the silver lining that program recipients enjoyed in 2023.
As of December 2022, 79% of Social Security recipients were aged 65 and above. This key age (65) being the eligibility point to enroll in Medicare. Although Medicare Part A (inpatient stays) has no premium for workers with the requisite quarters of coverage, Medicare Part B (outpatient services) premiums are, typically, deducted from a retired workers' monthly Social Security payout.
Medicare Part B premiums declined from $170.10 per month in 2022 to $164.90 per month this year. You'll note "declined" is in italics to emphasize how rare it is to see a year-over-year drop in Part B premiums. The roughly 3% dip in Part B premiums this year marks only the second time this century that they've fallen from one year to the next.
Although Social Security's COLA is designed to keep pace with, and not outpace, the prevailing rate of inflation, a rare decline in Part B premiums in 2023 may have allowed some retirees to actually "get ahead" and hang onto more of their cost-of-living adjustment. This won't be the case in 2024.
While Part B premiums for 2024 haven't officially been announced, the 2023 Medicare Trustees Report, which was released at the end of March, estimated that premiums would rise by nearly $10 per month: $164.90 to $174.80.
However, TSCL paints a potentially scarier picture. According to Mary Johnson, the U.S. Food and Drug Administration approval of Alzheimer's drug Leqembi, which sports an annual cost of $26,500 without insurance, could end up increasing Part B premiums by nearly $15 per month. If that's the case, a number of lifetime low-earning workers could be kissing most or all of their 2024 COLA goodbye.
To make matters worse, a comprehensive analysis by TSCL from January 2000 through February 2023 shows that the purchasing power of Social Security income has declined by a jaw-dropping 36%! The blame for this can be squarely placed on the CPI-W.
As its full name states, the CPI-W tracks the spending habits of "urban wage earners and clerical workers." These are often working-age Americans who aren't receiving a Social Security check. More importantly, they're spending their money very differently than the 86% of Social Security beneficiaries who are aged 62 and above.
Utilizing the CPI-W means underweighting the spending categories that matter most to seniors, such as medical care and shelter. The end result being a COLA that isn't reflective of the inflation rate most seniors are facing. An estimated 3.2% COLA in 2023, give or take a smidge in each direction, isn't going to change the fact that seniors have been drawing the short end of the stick for more than two decades.
