One thing you can count on when it comes to Social Security is change. Fortunately for retirees, one of the most welcome adjustments is the annual increase in monthly benefits, thanks to Social Security’s cost-of-living adjustment (COLA). It helps retirees cope with rising prices. Whether it’s higher grocery bills or climbing utility costs, inflation impacts the cost of everyday items. COLA ensures that Social Security payments adjust accordingly, allowing retirees to maintain some purchasing power.
Each year, the Social Security Administration (SSA) announces the new COLA percentage. While the official COLA for 2024 will be announced on October 10, many beneficiaries eagerly await this news to see how their checks will increase.
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COLA’s Impact
How exactly does COLA impact Social Security checks? It all comes down to inflation, specifically the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which is calculated by the Bureau of Labor Statistics (BLS). The CPI-W tracks changes in the prices of common goods and services, including food, household items, and other expenses typically incurred by urban households.
COLA is determined by comparing CPI-W data for July, August, and September to the previous year’s data. The percentage change in this average dictates how much Social Security checks will increase for the following year. For example, if the CPI-W rises by 5%, then Social Security benefits will also increase by 5%.
Unlike prices, which can go up and down, Social Security benefits never decrease due to COLA. If inflation were to fall, monthly benefits would remain the same. However, it’s worth noting that some years, such as 2010, 2011, and 2016, saw no increase at all because inflation was negligible.
Projections
Although the official COLA won’t be announced until October, groups like The Senior Citizens League (TSCL) monitor inflation data and make predictions. Recently, TSCL estimated a 2.5% COLA for 2024 based on current inflation trends. If accurate, this would be the lowest adjustment since 2021 when the increase was just 1.3%. The projected 2.5% also falls short of the historical average COLA, which has been 3.9% over the last 50 years.
This drop reflects a cooling inflation rate but also highlights the reality that even with COLA increases, Social Security benefits may not keep pace with rising costs for retirees, particularly in areas like healthcare.
CPI-W
The CPI-W has been used for decades to calculate COLA, but many argue that it doesn’t reflect the actual spending patterns of retirees. For instance, healthcare costs are a significant portion of expenses for older Americans, yet the CPI-W gives more weight to other categories that may be more relevant to younger, working individuals.
According to TSCL, Social Security benefits have lost roughly 20% of their purchasing power since 2010. A dollar of benefits today buys only 80% of what it could back then. Given this decline, many believe that it’s time for a change in how COLA is calculated.
One alternative approach is to use the Consumer Price Index for the Elderly (CPI-E), which specifically tracks costs for Americans aged 62 and over. The CPI-E gives more weight to categories that impact retirees, such as healthcare, potentially making it a better measure of inflation for this demographic. However, transitioning to a new methodology would require significant changes to the system, and for now, the CPI-W remains the standard for COLA adjustments.
The Future
As retirees wait for the next COLA announcement, many will continue to monitor inflation trends to gauge what the future holds for their benefits. While the CPI-W may not be perfect, it remains the tool used to adjust Social Security payments for the time being. Whether it’s through eventual adoption of the CPI-E or other changes, the hope is that future adjustments will better reflect the needs of retirees.
For now, the best thing Social Security recipients can do is stay informed. Check the SSA’s website after October 10 for the official COLA announcement and updates on any other changes that might impact your benefits.
FAQs
When will the 2024 COLA be announced?
The COLA will be announced on October 10, 2023.
How is the COLA calculated each year?
COLA is based on the CPI-W data from July to September.
Will Social Security payments decrease if inflation drops?
No, Social Security benefits never decrease due to COLA.
What is the projected COLA for 2024?
The Senior Citizens League estimates a 2.5% increase for 2024.
What alternative to CPI-W is being proposed?
The CPI-E, which tracks spending for Americans aged 62 and over.
