For most retired Americans, Social Security is an indispensable source of income. Annual surveys from national pollster Gallup have found that up to 90% of retired workers rely on their monthly Social Security check to cover at least a portion of their expenses.
Considering how vital Social Security benefits are to the financial well-being of tens of millions of seniors, there’s no event that’s more anticipated than the annual cost-of-living adjustment (COLA), which is announced during the second week of October.
What is Social Security’s COLA, and how big of a benefit increase can beneficiaries expect in 2024?
Social Security’s COLA is the tool the program uses to account for the inflationary pressure beneficiaries contend with. For instance, if the collective price for the goods and services that seniors regularly buy rises, Social Security benefits should increase, as well. Ideally, this increase is on par with the prevailing rate of inflation.
Since 1975, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) has been used to measure inflation and decipher annual cost-of-living adjustments for Social Security. If the average CPI-W reading from the third quarter (July September) of the current year — only third-quarter readings are used to calculate Social Security’s COLA — is higher than the average CPI-W reading from the third quarter of the previous year, inflation has occurred and the program’s nearly 67 million beneficiaries will receive bigger Social Security checks in the following year.
With the last puzzle piece (the September inflation report) unveiled on October 12, the Social Security Administration announced a 3.2% COLA for the upcoming year. While this is a far cry from the 8.7% cost-of-living-adjustment passed along this year, it still represents an above-average lift, when compared to the average COLA of 2.6% over the past 20 years.
In nominal-dollar terms, the average retired worker can expect their monthly Social Security check to rise by $59 to $1,907. Meanwhile, the average worker with disabilities and typical survivor beneficiary can expect their monthly payout to jump by $48 and $47, respectively, to $1,537 and $1,505 next year.
Although receiving a larger Social Security check might feel like a win on paper, the reality is that Social Security’s 2024 cost-of-living adjustment is giving retirees the short end of the stick.
The purchasing power of a Social Security dollar has been declining for decades
With no COLA in three of the past 15 years, a 3.2% increase to Social Security checks probably sounds great. But compare aggregate cost-of-living adjustments since January 2000 to the collective price increase for a basket of dozens of goods and services senior citizens regularly purchase, and you’re liable to be disappointed.
According to The Senior Citizens League, a nonpartisan senior advocacy group, Social Security’s COLAs have risen by an aggregate of 78% between January 2000 and February 2023. However, the cost of goods and services purchased by the typical retiree jumped by a staggering 141.4% over the same timeline. In other words, the purchasing power of a Social Security dollar has declined by 36% since this century began, and a 3.2% COLA in 2024 isn’t going to change that trend.
The culprit for this persistent drop in purchasing power is none other than the CPI-W. As its full name implies, it tracks the spending habits of “urban wage earners and clerical workers.” These are commonly working-age people who aren’t currently receiving a Social Security benefit. More importantly, they’re going to spend their money differently than the 86% of Social Security beneficiaries who are aged 62 and above.
Relative to younger workers, retirees spend a higher percentage of their monthly budget on medical care and shelter expenses. However, the CPI-W isn’t providing added weight to these categories, resulting in the index not accurately tracking the inflation that matters most to a majority of the program’s beneficiaries.
There’ll be no silver lining for retirees in 2024
Something else most Social Security beneficiaries are unlikely to be happy about is the lack of a silver lining in the upcoming year.
In 2023, Medicare Part B premiums — this is the part of Medicare that covers outpatient services — declined for only the second time this century. Lower-than-anticipated costs associated with Alzheimer’s disease drug Aduhelm, coupled with a big uptick in the Supplementary Medical Insurance Trust Fund, allowed for excess reserves to be used to reduce Part B premiums from $170.10 per month in 2022 to $164.90 per month in 2023. Medicare Part B premiums are usually deducted from an individual’s Social Security benefit.
But there will be no reprieve in 2024.
On the same day Social Security’s COLA was announced, the Centers for Medicare and Medicaid Services unveiled a nearly 6% increase in Part B premiums for the upcoming year ($164.90 per month to $174.70 per month). This increase is primarily being driven by the Food and Drug Administration’s approval of Alzheimer’s drug Leqembi, which can cost upwards of $26,000 annually without insurance.
A sizable uptick in Medicare Part B premiums is expected to somewhat or fully offset the more modest 3.2% COLA being passed along in 2024.
The taxation of benefits is becoming more common
The triple whammy for a growing number of retirees is that they may be taxed on what they receive from Social Security in 2024.
In 1983, Social Security’s asset reserves were nearly exhausted. With a potential benefit cut on tap without a deal, Congress passed and then-President Ronald Reagan signed the Social Security Amendments of 1983 into law. This last major overhaul of America’s top retirement program gradually increased the full retirement age, as well as introduced the taxation of Social Security benefits.
If a single tax filer generates in excess of $25,000 in provisional income (or $32,000 for couples filing jointly), up to 50% of their Social Security benefits can be exposed to federal income tax rates.
In 1993, a second tier of taxation was added by the Clinton administration that allowed up to 85% of benefits to be taxed at the federal level for single filers and couples filing jointly whose provisional income tops $34,000 and $44,000, respectively.
Here’s the kicker: Though these provisional income thresholds were introduced in 1983 and 1993, they’ve never been adjusted for inflation. With Social Security’s COLA pushing the average benefit higher over time, more and more retirees are being taxed on some portion of their Social Security check.
Furthermore, with Social Security staring down an estimated $22.4 trillion cash shortfall through 2097, there’s no incentive for lawmakers to remove this tax or adjust the thresholds for inflation.