For most retirees, Social Security income is essential. More than two decades of surveys by the national pollster Gallup have shown that an overwhelming percentage of current and future retirees rely, or expect to rely, on their Social Security income to cover at least part of their expenses.
Given the importance Social security benefits are tied to the financial well-being of our nation’s aging workforce, it’s no surprise that the cost-of-living adjustment (COLA) announced each year is the most anticipated event of the year for America’s Best Retirement Program. Unfortunately, there is no glimmer of hope for Social Security recipients in 2024.
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What exactly is the Social Security COLA and how is it calculated?
COLA is the mechanism that adjusts Social Security benefits most years to inflation (the increase in prices of goods and services). If the prices of goods and services that seniors regularly purchase collectively increase, benefits paid to retirees should, ideally, increase by the same percentage to avoid any loss of purchasing power. COLA is the tool that makes this possible.
For more than three decades after the first retirement benefit was paid in January 1940, Social Security’s cost-of-living adjustments were completely arbitrary and passed by special sessions of Congress. But since 1975, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) has served as the program’s inflationary measure.
The CPI-W has more than half a dozen major spending categories, as well as dozens and dozens of subcategories, all of which have their own respective weighting. These weightings help reduce the CPI-W to a single digit each month, making it easier to make month-to-month and year-to-year comparisons to see which direction prices are heading.
Only CPI-W figures from the third quarter (July-September) are used to calculate the Social Security COLA. If the average CPI-W value for the third quarter of the current year is higher than the average CPI-W value for the third quarter of the previous year, inflation has occurred and beneficiaries must receive a higher payment in the coming year.
The year-over-year percentage difference in average CPI-W readings in the third quarter, rounded to the nearest tenth of a percent, determines the increase in Social Security benefits during the year next.
An above-average cost-of-living adjustment awaits Social Security beneficiaries in 2024
In nominal dollars, the nearly 67 million Social Security beneficiaries have reason to smile.
Following the release of the September inflation report by the U.S. Bureau of Labor Statistics on October 12, the Social Security Administration announced a 3.2% cost of living adjustment for 2024. Although this is well below the 8.7% of COLA program recipients. year, it remains slightly higher than the average of 2.6% COLA transmitted over the last two decades.
For the nearly 50 million retirees who receive a monthly Social Security check, a 3.2% COLA translates to an estimated increase of $59 per month next year at an average of $1,907 per month.
But let’s not forget that Social Security does not provide a financial base for retired workers alone. About 7.4 million workers were eligible for long-term disability benefits in October. At the same time, approximately 5.8 million people currently receive a monthly survivor benefit based on a deceased worker’s earnings history.
Social Security’s 2024 COLA will increase the average monthly benefit for disabled workers and surviving beneficiaries by $48 and $47respectively, leading to average payments of $1,537 and $1,505 per month next year.
Persistently high core inflation, supported by rising rents and housing costs, is the main culprit for Social Security checks to rise 3.2% next year.
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There will be no glimmer of hope for Social Security recipients next year
On paper, an above-average COLA probably sounds good. But dig a little deeper and you’ll see that a potential triple whammy awaits retirees in 2024.
To start, the Social Security cost-of-living adjustment deceived retirees for over two decades. That’s because the CPI-W tracks the spending habits of “urban wage earners and office workers.” While 86 percent of Social Security recipients are age 62 and older, most urban wage earners and office workers are working-age Americans who do not currently receive a Social Security check.
According to a May 2023 analysis by the Senior Citizens League, a nonpartisan senior advocacy group, cumulative COLAs between January 2000 and February 2023 increased benefits by about 78%. In comparison, the cost of a full basket of dozens of goods and services typically purchased by retirees increased 141.4% over the same period. In other words, the the purchasing power of a Social Security dollar fell by 36% since the beginning of this century. A COLA of 3.2% in 2024 will not stop this persistent loss of purchasing power.
There’s also no glimmer of hope for retired workers with traditional Medicare coverage in 2024.
In 2023, Medicare Part B premiums — this is the segment of Medicare that covers outpatient services — decreased by approximately 3% (from $170.10/month to $164.90/month). It was only the second time this century that Part B premiums declined year over year. Since Part B premiums are often deducted from a worker’s monthly benefit and this year’s COLA was a historic high of 8.7%, most retirees were able to “gain advance” and exceed the current inflation rate. In other words, they kept more of their benefit increases.
This will not be the case next year. The approval of the new Alzheimer’s drug Leqembi, which can cost $26,500 a year for the uninsured, is responsible for a nearly 6% increase in Part B premiums, at $174.70/month. A sizable increase in Part B premiums will offset some or all of next year’s COLA for most retirees.
The third problem facing retirees in 2024 is a higher likelihood of being subject to federal taxation of Social Security benefits.
The Social Security Amendments of 1983 introduced taxation of benefits as a means of generating additional income. If the beneficiary provisional income exceeds $25,000 (or $32,000 for a couple filing jointly), up to half of their benefits may be subject to federal income tax rates.
In 1993, the Clinton administration added a second tax tier that represented up to 85 percent of taxable Social Security benefits for singles and couples whose provisional income exceeded $34,000 and $44,000, respectively. None of these income thresholds have been adjusted for inflation since their introduction decades ago.
Even though annual Social Security COLAs have not kept pace with the real inflation that retirees have faced, the likelihood that retirees will be taxed on their benefits increases with each passing year.
