Social Security Benefits Got a 3.2% COLA in 2024. Here's How That Compares to the 10-Year Average COLA

Social Security benefits are protected from inflation by annual cost-of-living adjustments (COLAs). But some retired workers feel shortchanged by the 3.2% COLA in 2024. That figure is paltry when compared to the 8.7% boost in 2023 and the 5.9% COLA in 2022, and the rampant inflation of the last few years is still fresh in the minds of many Americans.

However, some perspective could help retired workers feel better about the latest benefit increase. Read on to see the average Social Security COLA over the last decade, and learn why a bigger COLA in 2024 could have been a bad thing.

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The average Social Security cost-of-living adjustment (COLA) over the last 10 years

Since 1975, Social Security benefits have received annual cost-of-living adjustments (COLAs) to offset the impact of inflation. Those COLAs are based on changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), a monthly measure of price changes based on the spending patterns of workers.

To elaborate, the third-quarter CPI-W from the current year (i.e., July through September) is divided by the third-quarter CPI-W from the previous year. The percent increase (if any) then becomes the COLA in the following year. For instance, the third-quarter CPI-W increased 3.2% in 2023, which is why Social Security benefits got a 3.2% COLA in 2024.

The table below shows the Social Security COLA in each of the last 10 years. It also includes the 10-year average COLA at the bottom.

Data source: Social Security Administration. Shown above is the Social Security cost-of-living adjustment (COLA) in each year over the past decade. The 10-year average has been rounded up from 2.75% to 2.8%.

As seen above, the average Social Security COLA was 2.8% over the last decade. That means the 3.2% COLA in 2024 is well above the 10-year average. Additionally, while not shown in the table above, the average Social Security COLA was 2.6% over the last two decades, so the 2024 COLA looks even better compared to the 20-year average.

A bigger Social Security COLA could have brought benefit cuts closer

A recent survey from Natixis found that inflation is the most common financial fear among workers and retired workers. That tells me Americans won't soon forget the hardships brought on by rapid price increases during the last few years. However, a smaller COLA means inflation is slowing, which means Social Security benefits will retain their buying power to a better degree this year. That is a positive development. But there is another angle to the situation that beneficiaries should consider.

The Social Security program is burning money quickly. In fact, the Old-Age, Survivors, and Disability Insurance (OASDI) trust fund -- the source of benefits paid to retired workers and other beneficiaries -- is on pace to be depleted by 2034, according to the Board of Trustees. But that timeline was predicated on certain assumptions, including a COLA no higher than 3.3% in 2024. Anything more could have accelerated the time to trust fund depletion.

So what? The Trustees estimate that 80% of benefits would be payable if the OASDI trust fund does indeed become depleted in 2034. At that point, benefit cuts of at least 20% would happen automatically unless Congress finds a solution beforehand. A higher COLA in 2024 could have moved those benefit cuts closer, giving lawmakers in Washington less time to deal with the problem. In fact, the 8.7% COLA in 2023 actually did move the timeline forward by one full year. Prior to that massive benefit increase, the OASDI trust fund was on pace to be depleted in 2035 (not 2034).

Of course, neither silver lining I mentioned puts more money in the pockets of Social Security beneficiaries, and the 2024 COLA is undoubtedly a disappointment compared to the pay increases in the two preceding years. But inflation has declined sharply from its peak of 9.8% (as measured by the training 12-month change in the CPI-W) in June 2022. In fact, the reading was 3.3% in December 2023. Social Security beneficiaries should err on the side of conservatism when making financial decisions, but there is good reason to believe price increases will be much less severe in 2024 as compared to the last few years.