Many seniors get the bulk of their income from their monthly Social Security benefits. So naturally, Social Security recipients tend to hope for a large cost-of-living adjustment, or COLA, from one year to the next.
In 2023, Social Security recipients got an 8.7% COLA. But 2024's COLA is going to be much smaller.
The Social Security Administration (SSA) just announced that in the new year, benefits will only be rising by 3.2%. When we factor in an uptick in the cost of Medicare Part B, it's going to leave seniors with a much less robust raise than they received earlier this year.
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Whether you're currently collecting Social Security or not, it's important to have a good sense of how the program's COLAs work. Here are some key things you need to know.
1. They're directly tied to inflation
Social Security COLAs are based on third quarter data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). If you've ever wondered why the SSA doesn't announce COLAs until October, it's because of the need to wait for inflation data from July through September to arrive.
Now if you've been on Social Security for a while and have noticed that your COLAs don't really do a great job of helping you keep up with inflation, you're no doubt in good company. Many senior advocates are pushing for a way to calculate Social Security COLAs outside of the CPI-W. The argument is that the expenses commonly incurred by urban wage earners and clerical workers aren't necessarily indicative of the expenses commonly incurred by retirees.
In fact, there's been a push to change the way Social Security COLAs are calculated by moving to a senior-specific index, or a Consumer Price Index for the Elderly. But so far, lawmakers are not rushing to approve such a change.
2. They're not guaranteed
Just as workers are not guaranteed an annual raise unless that's written into their employment contracts, so too are Social Security recipients not guaranteed a boost in benefits from one year to the next. In fact, there have been years when Social Security beneficiaries have gotten a 0% COLA, or close to it.
That's because those COLAs hinge on inflation. And when there's no measurable rise in the CPI-W from one year to the next, there's no COLA to be had.
3. There's no such thing as a negative COLA
While it's more than possible for inflation to dip from one year to another, the good news is that Social Security benefits are not adjusted downward for shrinking inflation. The worst that can happen is that benefits simply don't get a lift.
Furthermore, seniors who are enrolled in Social Security and Medicare at the same time are protected from seeing their benefits go down when Part B hikes arrive thanks to the hold harmless rule. Enrollees in both programs have their Medicare Part B premiums deducted from their Social Security benefits automatically. It's possible to have a year with, say, a 0% COLA and a $10 monthly increase in the cost of Medicare Part B.
Without that hold harmless provision, a beneficiary in that situation might see their monthly Social Security payment drop by $10. But thanks to that rule, someone on Social Security cannot see their monthly benefit drop from one year to the next regardless of what happens with Medicare Part B.
Social Security COLAs are an important thing to seniors who rely on the program for income. It's important to understand what goes into COLAs -- and also, that a rise in benefits from one year to the next is by no means guaranteed.
