For the past couple of years, seniors on Social Security have had reason to celebrate in October. That's the month when the Social Security Administration announces what the upcoming year's cost-of-living adjustment (COLA) will be. And the raises that have arrived over the past two years have been notably generous.
In January 2022, seniors on Social Security saw their monthly benefits rise by 5.9%. And in January 2023, benefits went up an almost astounding 8.7%.
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But in 2024, Social Security recipients will only get a 3.2% increase to their benefits. And for many seniors, that's bad news in the context of recent COLAs.
But actually, a smaller Social Security COLA is great news for the broad economy.
A sign of cooling inflation
Social Security COLAs are tied directly to the Consumer Price Index for Urban Wage Earners and Clerical Workers, a subset of the well-known Consumer Price Index (CPI). The CPI is used as a general measure of inflation. So when the media reports that "inflation" rose by a certain amount in a given month, it's usually referring to the increase in the CPI.
Meanwhile, the purpose of Social Security COLAs is to allow the checks distributed to the program's beneficiaries to maintain their relative buying power as inflation drives living costs upward. And the reason seniors on Social Security enjoyed ultra-high COLAs in 2022 and 2023 was that inflation was rampant in the years leading up to those raises.
But inflation has cooled nicely in 2023. In September, the CPI was only up 3.7% on an annual basis, which isn't so far off from the 2% annual inflation target the Federal Reserve likes it to hit. And so while seniors on Social Security may be disappointed with their upcoming raises, the reality is that a smaller COLA is a sign that inflation levels have receded to more moderate levels. And that's good news for consumers on the whole.
It's also particularly good news for retirees, many of whom get the bulk of their income from their Social Security benefits. While a smaller Social Security boost might initially raise concerns among seniors, the reality is that cooling inflation could lead to lower costs at the grocery store, pump, and just about everywhere. And that, more so than a larger COLA, could be the ticket to helping seniors maintain their buying power.
Seniors can still look forward to a decent raise
Even though 2024's Social Security COLA will pale in comparison to the COLAs of the past two years, it's not as though beneficiaries won't be getting a notable raise. Even with an uptick in the cost of Medicare Part B that will result in about a $10 monthly increase for enrollees, the typical recipient should still see their monthly Social Security benefit rise by about $50. That's apt to be helpful.
All told, a smaller COLA compared to recent years is a sign that inflation is becoming less problematic. If, in 2024, annual inflation gets back down to around 2% like the Fed wants, it will likely lead to an even less robust Social Security raise in 2025. But again, that's not necessarily a bad thing.
