In a little over a month, retirees who receive Social Security will get a raise. The average retired worker should see nearly $60 added to their monthly benefit. That translates to more than $700 next year.
This cost-of-living adjustment (COLA) will help offset the rising costs of goods and services. But will your 3.2% Social Security increase in 2024 be enough? Here's what history shows.
Image source: Getty Images.
The timing of Social Security COLAs
To learn from history, we must first understand more about the timing of Social Security COLAs. The most important thing to know is that the COLAs are paid after beneficiaries have incurred higher costs.
Each October, the Social Security Administration (SSA) calculates how much of an adjustment will be made to Social Security benefits. This adjustment goes into effect in the following year.
The calculation, though, is based on inflation levels in the third quarter of the current and previous years. To be specific with regards to next year's COLA, SSA determined the percentage increase in the average Consumer Price Index for Wage Earners and Clerical Workers (CPI-W) in the third quarter of 2023 from the CPI-W average in Q3 of 2022.
History lessons using a simplistic approach
One quick-and-dirty way to determine if Social Security COLAs in the past were enough is to look at the adjustment in each year compared to the adjustment in the next year. If the subsequent COLA is higher than the prior year's COLA, retirees don't receive a big enough benefit increase to offset the higher costs of products and services.
For example, let's go back to 2021. SSA announced a COLA of 5.9% that went into effect in January 2022. However, inflation skyrocketed in 2022. The subsequent COLA calculated in October 2022 was 8.7%. Since 8.7% was much higher than 5.9%, the COLA received in 2022 clearly wasn't enough to cover the higher costs that retirees incurred.
This scenario where inflation was higher than the increase received has occurred 21 times since annual Social Social COLAs were implemented in 1975. In more than half of the years during that period, retirees' annual increase was greater than the actual inflation rate. This seems to indicate that the odds are at least a little in your favor that the 3.2% Social Security increase in 2024 will be higher than inflation next year.
Two issues
There are issues with this simplistic approach, though. For one thing, as we've already seen, SSA only uses Q3 in calculating COLAs. It's possible that the inflation rate during the full year could be higher or lower than a number based on only part of the year.
An even bigger problem relates to the timing of COLAs. Unless there is no inflation in the next year, the Social Security increase won't be enough. Why? Inflation is cumulative.
Let's look at an example to better understand this. In January 2023, retirees received an 8.7% COLA. This reflected the soaring inflation experienced in 2022. Those higher prices from last year persisted into 2023. Prices actually rose even more this year -- just at a lower rate of growth. As a result, the 8.7% increase for 2023 hasn't been enough to fully offset the higher costs that retirees have incurred.
Unless there is no inflation in a given year, the COLA will never be enough. It can happen, but it's relatively rare. Since 1975, there have been only three years where retirees didn't receive a benefits increase to help offset the impact of inflation.
So will your 3.2% Social increase in 2024 really be enough? Using history as a guide, probably not.
