If you're retired, you just received good news. The 2024 Social Security cost-of-living adjustment (COLA) will be 3.2%. Granted, that's a lot lower than the 8.7% increase received in 2023. However, it will nonetheless be helpful for millions of Americans.
You might not want to celebrate too much just yet, though. Sure, your Social Security retirement benefits will be higher next year. But here's why you probably won't see all of the increase.
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Higher Social Security benefits on the way
Let's first focus on the good news: Higher benefits are definitely on the way. Every person who receives Social Security payments will enjoy a relatively nice bump beginning in January 2024.
Of course, the exact dollar amount of your increase depends on what your benefit is now. However, we can look at the average monthly Social Security payment to get a sense of how much more money is on the way.
In August 2023, retired workers received an average monthly benefit of $1,840.27. When the 3.2% COLA for 2024 goes into effect, this average will increase by $58.89 per month to $1,899.16.
The average retiree won't actually see an extra $58.89 hit their bank account each month, though. And it's not because of federal income taxes. Not everyone has taxes withheld from their monthly Social Security payment.
Social Security gives, Medicare takes away
You probably won't see the full impact of the 2024 COLA for a simple reason: Medicare Part B premiums are almost certainly going up. Most retirees who are enrolled in Medicare have their Part B premiums deducted automatically from their Social Security benefits.
The Medicare Trustees Report published in March 2023 projected that the standard monthly Part B premium will increase by nearly $10 in 2024, from $164.90 to $174.80. Beneficiaries who file individual tax returns with adjusted gross incomes of more than $97,000 and those filing joint tax returns with adjusted gross incomes of more than $194,000 will pay higher premiums.
However, the Medicare trustees' estimate came out before Medicare announced that it would cover a new Alzheimer's disease drug called Leqembi. This is a very expensive drug that will add significantly to Medicare's total costs. The Senior Citizens League predicted that Leqembi could add another $5 per month to Medicare Part B premiums on top of the nearly $10 hike predicted by the Medicare trustees earlier this year.
We now know, though, that the concerns about Leqembi's costs were overblown -- at least for now. The Centers for Medicare and Medicaid Services announced that the 2024 standard Medicare Part B premium will be $174.20, up $9.80 from the current rate. This will reduce the positive impact of the Social Security COLA by nearly 17%.
Social Security's COLA timing issue
Most retirees won't see all of the 3.2% Social Security COLA for 2024 actually make it to your bank account because of the higher Medicare Part B premium. There's also another factor that could erode how much what you receive will actually help: Social Security has a COLA timing issue.
The COLA for 2024 was calculated based on the increase in inflation between the third quarter of 2022 and the third quarter of 2023. Retirees will have already felt the impact of the higher prices of goods and services before they receive one penny from the Social Security increase for next year.
It's even possible that inflation could be worse next year than it has been so far in 2023. Fuel prices might soar with geopolitical uncertainty. That would cause the prices of many other products to increase as well. In this scenario, a 3.2% COLA would quickly lose its fizz.
That said, retirees will still be better off with the Social Security increase than they would be without any adjustment at all. Despite the offset from higher Medicare Part B premiums and the prospects of higher inflation, Social Security's recently announced COLA truly is good news.
