The most important day of the year for the nearly 67 million Social Security recipients is just 25 days away.
On Thursday, October 12, 2023, the US Bureau of Labor Statistics (BLS) will release the September inflation report. This report provides the final piece of the puzzle needed to calculate Social Security’s cost of living adjustment (COLA) for the coming year.
Image source: Getty Images.
All eyes are on Social Security’s upcoming cost-of-living adjustment announcement
COLA is the fancy term the Social Security Administration (SSA) uses to describe the “increase” that beneficiaries receive in most years to offset inflation – the rising prices of goods and services they struggle with have. Ideally, benefits should increase in step with inflation to ensure that program beneficiaries do not lose any of their purchasing power.
Also note that “raise” is in quotation marks. This is meant to mean that Social Security’s COLA is aligned with the prevailing inflation rate. This is different from a raise an employee may receive, which may be above the rate of inflation.
For the past 48 years, the Consumer Price Index for Urban Wage Earners and Office Workers (CPI-W) has been the inflationary mainstay of America’s premier retirement program. But even though the CPI-W is reported monthly, only three months (July through September) are included in Social Security’s annual COLA calculation.
The SSA determines the average CPI-W value for the third quarter (Q3) of the current year and compares it to the average CPI-W value for the third quarter of the previous year. If the value has increased, it means inflation has occurred. The amount of payout increase that beneficiaries will receive next year is simply the percentage difference between the two Q3 values, rounded to the nearest tenth of a percent.
In the rare event that deflation occurs and prices fall year-on-year, benefits will remain unchanged the following year. This has only happened three times since 1975.
Social Security’s COLA for 2024 increases slightly
Last week, on Wednesday, September 13, the BLS released the August inflation report, which is the second of three pieces of the puzzle needed to calculate Social Security’s cost-of-living adjustment. Based on previous estimates and the information we received from the August inflation report, it appears that the “increase” will be creeping higher next year.
US inflation rate data from YCharts.
Following the two previous BLS inflation reports (i.e., the June and July inflation reports), the nonpartisan senior advocacy group The Senior Citizens League estimated that Social Security’s COLA would be 3% in 2024. But after the August inflation report, Mary Johnson, senior policy analyst at TSCL, now thinks the program’s COLA could reach 3.2%.
What would a 3.2% COLA actually look like in dollar terms? In August 2023, the average retiree brought home a monthly check of $1,840.27. A 3.2% COLA would put almost an extra $59 more per month in the typical retiree’s pocket in 2024.
Employees with disabilities and surviving dependents would also not be excluded. Based on monthly payouts of $1,486.83 for workers with disabilities and $1,454.48 for all survivors as of August, a 3.2% cost-of-living adjustment would mean nearly $48 more each month for long-term disabled workers and nearly $47 a month for the long-term disabled means the survivors of deceased workers.
The trigger for this potentially juicier “surge” in 2024 is that the US inflation rate picks up again. For example, although energy costs are slightly lower on an unadjusted 12-month basis, West Texas Intermediate crude oil reached its highest level in 10 months last week in August. Translation: Prices at the pump are starting to rise again.
Furthermore, core inflation remains stubbornly high. “Core inflation” removes food and energy costs from the equation. What’s notable is that accommodation costs rose 7.3% last year – and accommodation is the most important of all spending categories.
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Social Security’s 2024 COLA could be a double whammy for retirees
Considering that beneficiaries have enjoyed a COLA greater than 3% only three times in the past 14 years, a 3.2% COLA in 2024 would likely be welcome, although far from the historical increase would be away from the 8.7% they received this year.
Unfortunately, Social Security’s 2024 COLA is becoming a double-edged sword for retirees. No matter how big or small the raise, you’re in for a double whammy.
Perhaps the biggest problem for the nearly 50 million retired Social Security recipients is that their Social Security funds are losing purchasing power over time. To be clear, the CPI-W does a poor job of accounting for inflation, which matters to seniors.
The problem with the CPI-W lies in its name. It is an inflation index that takes into account the spending habits of “urban wage earners and office workers.” These are often working-age Americans who do not receive Social Security benefits.
More than 80% of Social Security recipients are now 62 years old and older. Allowing the CPI-W to set annual COLAs will result in underweighting key spending categories for seniors (e.g., housing and medical care). The end result, according to TSCL, is a 36% loss in purchasing power since the start of the century. A 3.2% COLA or an “increase” anywhere near that will not reverse this continued loss of purchasing power over time – especially if shelter inflation remains well above historical norms.
But that is not the only concern for pensioners in 2024.
In late March, the Medicare Trustees Report predicted Part B premiums would rise by nearly $10 per month next year ($164.90/month to $174.80/month). Medicare Part B covers outpatient services, and monthly Part B premiums are often automatically deducted for Social Security recipients. Even though Part B premiums fell last year, a true rarity, an estimated 6% increase in Part B in 2024 would fully offset the Social Security COLA for many low-income beneficiaries.
Worse, the Medicare Trustees Report estimate could still be poor. According to Mary Johnson, the U.S. Food and Drug Administration’s 2023 approval of the Alzheimer’s drug Leqembi, which has an annual price tag of $26,500, could single-handedly reduce 2024 Part B premiums by $5 per year increase month.
It looks like Social Security’s cost of living adjustment won’t have much of an impact one way or another through 2024.