Regardless of whether you're already retired or just entering the labor force, Social Security income is liable to play a key role in helping you make ends meet. Based on more than two decades' worth of annual surveys from national pollster Gallup, between 80% and 90% of current retirees, along with 76% to 88% of non-retirees, are reliant on, or expect to lean on, Social Security as a major or minor income source during retirement.
Given how critical Social Security is to the financial foundations of so many Americans, there's no announcement that's more important or anticipated than the annual cost-of-living adjustment (COLA).
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Here's why all eyes are on Social Security's COLA
Social Security's cost-of-living adjustment provides a means for the program to factor in inflation. If the price for goods and services commonly purchased by seniors rises, Social Security checks should, ideally, rise by the same percentage to ensure no loss of purchasing power. COLA is the tool that increases payouts most years to account for inflation.
Prior to 1975, Social Security's COLA was entirely arbitrary and passed along by special sessions of Congress. During the 1940s -- the first Social Security retired-worker benefit went out on Jan. 31, 1940 -- not a single COLA was passed along to beneficiaries.
Since 1975, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) has been the inflationary tether used to calculate the annual COLA for Social Security. The monthly reported CPI-W has eight major spending categories, along with countless subcategories, all of which have specific weightings. These weightings are what allow the CPI-W to be whittled down to a single figure each month, which makes for easy year-over-year comparisons.
Despite the CPI-W being reported by the U.S. Bureau of Labor Statistics (BLS) each month, only readings from the third quarter (July through September) are used in the COLA calculation. If the average CPI-W reading from the third quarter of the current year is higher than the average CPI-W reading from the third quarter of the previous year, prices have moved higher and Social Security beneficiaries are due a "raise" in the upcoming year. The year-over-year percentage increase in third-quarter average CPI-W readings, rounded to the nearest tenth of a percent, determines how much benefits will increase in the upcoming year.
Here's where Social Security's 2024 cost-of-living adjustment ranks, historically
When the BLS released the September inflation report at 8:30 a.m. ET on Oct. 12, it provided the last puzzle piece needed to calculate Social Security's 2024 COLA.
Based on the CPI-W data, Social Security's more than 66 million recipients will see their checks increase by 3.2% next year. For the nearly 50 million retired workers currently receiving a monthly payout, it means an average increase of $59 per month. Meanwhile, the average monthly benefit check for workers with disabilities and survivors of deceased workers is estimated to increase by $48 and $47, respectively, in 2024.
In terms of percentage increase, a 3.2% COLA ranks favorably when compared to the average cost-of-living adjustment of 2.6% over the past 20 years. But pan out a bit further and beneficiaries are likely to be disappointed.
| Year | COLA | Year | COLA | Year | COLA |
|---|---|---|---|---|---|
| Oct. 1950 | 77% | 1984 | 3.5% | 2004 | 2.7% |
| Oct. 1952 | 12.5% | 1985 | 3.1% | 2005 | 4.1% |
| Oct. 1954 | 13% | 1986 | 1.3% | 2006 | 3.3% |
| Feb. 1959 | 7% | 1987 | 4.2% | 2007 | 2.3% |
| Feb. 1965 | 7% | 1988 | 4% | 2008 | 5.8% |
| March 1968 | 13% | 1989 | 4.7% | 2009 | 0% |
| Feb. 1970 | 15% | 1990 | 5.4% | 2010 | 0% |
| Feb. 1971 | 10% | 1991 | 3.7% | 2011 | 3.6% |
| Oct. 1972 | 20% | 1992 | 3% | 2012 | 1.7% |
| April 1974 | 7% | 1993 | 2.6% | 2013 | 1.5% |
| July 1974 | 11% | 1994 | 2.8% | 2014 | 1.7% |
| 1975 | 8% | 1995 | 2.6% | 2015 | 0% |
| 1976 | 6.4% | 1996 | 2.9% | 2016 | 0.3% |
| 1977 | 5.9% | 1997 | 2.1% | 2017 | 2% |
| 1978 | 6.5% | 1998 | 1.3% | 2018 | 2.8% |
| 1979 | 9.9% | 1999 | 2.5% | 2019 | 1.6% |
| 1980 | 14.3% | 2000 | 3.5% | 2020 | 1.3% |
| 1981 | 11.2% | 2001 | 2.6% | 2021 | 5.9% |
| 1982 | 7.4% | 2002 | 1.4% | 2022 | 8.7% |
| 1983 | 3.5% | 2003 | 2.1% | 2023 | 3.2% |
Data source: Social Security Administration.
What you see above is a snapshot of all 60 COLAs since Social Security's inception, including the three years where deflation occurred and no COLA was passed along. Keep in mind that the first 11 cost-of-living adjustments were passed along by special sessions of Congress and weren't calculated by the CPI-W.
The 3.2% COLA in 2024 ranks in the middle of the pack -- 34th overall out of 60 possible cost-of-living adjustments. Though a 3.2% COLA is above average over the past two decades, it's a relatively modest benefit bump when looking back more than seven decades.
Seniors are facing a potential double whammy in 2024
On a nominal-dollar basis, a 3.2% COLA probably doesn't look too bad on paper. It'll lift the average retired-worker benefit above $1,900 per month and is considerably better than the 1% COLAs beneficiaries have become accustomed to receiving over the past 20 years. Nevertheless, seniors are set up for a potential double whammy in 2024.
The first issue is that the CPI-W hasn't been doing a particularly good job of tracking inflation.
If you're wondering how a broad-based inflationary tether can fail to do its job, look no further than its full name: the Consumer Price Index for Urban Wage Earners and Clerical Workers (emphasis added). As the italics show, this is an index that tracks the spending habits of predominantly working-age Americans who don't receive a Social Security benefit. Meanwhile, 86% of Social Security's beneficiaries are aged 62 and above.
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Tracking the spending habits of working-age Americans means expenses of high importance to seniors, such as shelter and medical care, aren't receiving added weighting in the COLA calculation. As a result, the purchasing power of Social Security income for seniors has declined by a whopping 36% since January 2000. A 3.2% COLA in 2024 isn't going to make much, if any, headway toward halting or reversing this persistent loss of purchasing power.
The other bad news for most Social Security beneficiaries is that the Medicare Part B premium -- Part B is the segment of Medicare that covers outpatient services -- is set to climb by nearly 6% in 2024. Part B premiums are often deducted directly from a retiree's Social Security check.
This year marked only the second time this century that Medicare Part B premiums declined. When coupled with a historically high 8.7% COLA in 2023, it allowed most beneficiaries to keep more of their cost-of-living adjustment. This isn't going to be the case in 2024. The $9.80/month increase in Part B premiums will offset some or all of next year's cost-of-living adjustment for most beneficiaries.
