There's no announcement more anticipated each year by Social Security's more than 66 million beneficiaries than the cost-of-living adjustment (COLA). The program's COLA, which is unveiled during the second week of October, lets program recipients know how much their benefit will increase in the upcoming year.
Although the 2024 COLA did come in above the average benefit increase over the past 20 years, it's still a major letdown in a variety of ways.
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What's Social Security's cost-of-living adjustment (COLA) and how is it calculated?
The purpose of Social Security's COLA is to prevent program beneficiaries from losing purchasing power. If the price of the goods and services seniors regularly buy increases, benefits should, in an ideal world, rise by a commensurate amount. COLA is the mechanism responsible for pushing benefits higher most years.
Before 1975, the program's cost-of-living adjustment was completely arbitrary and determined by special sessions of Congress. During the 1940s, not a single COLA was passed along. Since 1975, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) has been the tool used to measure inflation and calculate the program's COLA.
Though the CPI-W is reported monthly by the U.S. Bureau of Labor Statistics (BLS), only readings from the third quarter (July through September) factor into the calculation. While the other nine months can help establish inflationary trends, they aren't used to determine Social Security's COLA. The BLS doesn't report September's inflation data until the second week of October, which is the final puzzle piece needed to calculate the upcoming years' cost-of-living adjustment.
If the average CPI-W reading from the third quarter (Q3) in the current year is higher than the average CPI-W reading from Q3 of the previous year, inflation has occurred. More importantly, it means Social Security beneficiaries are in line for an increase to their monthly check in the upcoming year. The magnitude of the increase is simply the percentage difference in average Q3 CPI-W readings from one year to the next, rounded to the nearest tenth of a percent.
An above-average COLA is on the way in 2024
This past Thursday, Oct. 12, 2023, the BLS released the September inflation report, which provided the final data point needed to calculate Social Security's 2024 cost-of-living adjustment.
On the surface, things look great, with beneficiaries set to receive a 3.2% COLA in 2024. Over the past 15 years, there have been three instances where no COLA was passed along (i.e., deflation occurred and prices declined from one year to the next). Meanwhile, the average COLA over the previous 20 years is 2.6%. A 3.2% COLA may not be flashy, but it's unquestionably an above-average increase to monthly Social Security checks.
But it's one thing to talk about percentages and another to look at what a 3.2% cost-of-living adjustment actually means in dollar terms.
Based on estimates from the Social Security Administration (SSA), the average monthly payout for the nearly 50 million Americans currently receiving a retired-worker benefit check should increase $59 to $1,907 by January 2024. On an annualized basis, the typical retired worker will be bringing home close to $22,900 from Social Security.
However, Social Security's COLA applies to all program beneficiaries -- not just retired workers. The program has close to 7.5 million workers with disabilities receiving a check each month. According to the SSA, the average worker with disabilities will see their monthly payout grow $48 to $1,537 as a result of the 3.2% COLA.
America's top retirement program also doles out monthly payments to roughly 5.8 million survivor beneficiaries. The average survivor benefit in 2024 is on track to rise by $47 per month to about $1,505.
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Four reasons Social Security's 3.2% COLA is a letdown
But while a 3.2% COLA may look great on paper, a deeper dive suggests it's a monumental letdown.
To start with, the 3.2% cost-of-living adjustment being passed along in 2024 is considerably lower than the 8.7% COLA beneficiaries received this year. Though the argument can be made that a decline in the overall rate of inflation -- and therefore a more modest annual COLA -- is a good thing, the inflation rate for shelter, a key expense for retirees, remains stubbornly high. There's little question that an average increase of $59 per month for retired workers in 2024 is going to feel like a letdown after a nominal-record $146-per-month average boost heading into 2023.
Another source of frustration for existing beneficiaries is the steady loss of purchasing power for Social Security income.
According to The Senior Citizens League (TSCL), a nonpartisan group focused on advancing issues impacting seniors, the purchasing power of a Social Security dollar has plunged by 36% since January 2000. The culprit for this mess is none other than the CPI-W.
As the CPI-W's full name shows, it's an index tasked with tracking the spending habits of "urban wage earners and clerical workers." These are predominantly working-age Americans who aren't receiving a Social Security check. That's a problem given that 86% of existing beneficiaries are aged 62 and above. A 3.2% COLA simply isn't going to make a dent after a steady loss of purchasing power spanning 23 years.
The third reason Social Security's cost-of-living adjustment is a disappointment is because there'll be no silver lining for retirees in 2024.
This year, Medicare Part B premiums declined for only the second time since this century began. Medicare Part B covers outpatient services, and the premiums associated with Part B are often automatically deducted from retirees' Social Security checks. A historically high COLA of 8.7% in 2023, coupled with a modest drop in Part B premiums, allowed some beneficiaries to hang on to more of their COLA.
This won't be the case in 2024. The 2023 Medicare Trustees Report, which was released in late March, forecast a nearly $10/month increase in Part B premiums in 2024. Meanwhile, TSCL opined that the approval of Alzheimer's drug Leqembi, which carries an annual cost of more than $26,000 without insurance, could increase Part B premiums by up to $15 per month. Long story short, lifetime low-earners could see most or all of their 3.2% COLA gobbled up by rapidly rising Part B premiums.
Last but not least, more beneficiaries than ever are likely going to be exposed to the taxation of benefits. Yes, Social Security income can be taxable at the federal level and in 12 states.
The Social Security Amendments of 1983 introduced the taxation of benefits, which allow up to 50% of an individual's benefits to be taxed at the federal rate if their provisional income surpasses $25,000 (or $32,000 for couples filing jointly). In 1993, a second taxation tier was added that allows up to 85% of benefits to be taxed at the federal rate for single filers and couples filing jointly with more than $34,000 and $44,000 in provisional income, respectively.
Since being introduced decades ago, these provisional income thresholds have never been adjusted for inflation. With every passing COLA comes an increased likelihood of being exposed to the taxation of benefits.
