Cooling inflation points to 3% Social Security COLA for 2024

While prices for some essentials continue to increase, it's likely that the cost-of-living adjustment will be much lower than 2023's.

Social Security benefits are on track to increase by 3% in 2024, a response to cooling inflation that will dial back the annual cost-of-living adjustment from the much higher 8.7% implemented this year.

Figures for the consumer price index for urban wage earners and clerical workers, the CPI-W, published Thursday showed an increase of 2.6%, while the CPI for All Urban Consumers (CPI-U) increased in July by 3.2% year over year. The former is key, as it’s used by the Social Security Administration to calculate the COLA for the following year, with the average year-over-year inflation in July, August and September used as the basis for the calculation, according to projections from The Senior Citizens League.

The group estimates a 3% COLA increase based on an average rise in the CPI-W of about 3% since January. The Social Security Administration announces the coming year’s COLA in October.

Last year’s 8.7% increase was the biggest in 42 years. While inflation has calmed down this year, prices for many items have continued to rise at a pace that has put a strain on older Americans, according to July survey data published by The Senior Citizens League.

Of more than 1,700 people in the survey, 79% said that their monthly budgets for essentials like housing, food and prescriptions increased over 12 months, while 9% said those costs were steady, 7% said they went down and 5% were unsure.

Simultaneously, retirees increasingly pay taxes on their Social Security benefits, that survey found. This year, following a Social Security COLA of 5.9% for 2022, 23% of beneficiaries said they paid taxes for the first time on those payments, according to The Senior Citizens League. Given the 8.7% COLA for 2023, the group expects a higher percentage of people to pay taxes on their benefits in 2024.

With a 3% COLA, the average monthly Social Security benefit of $1,789 would increase by more than $53, the group stated.

“It is important to understand that falling inflation numbers don’t mean that the cost of living is falling. Things are still 3.2% more expensive than they were a year ago. Even with 3% inflation, costs double in about 24 years,” Brandon Gibson of Gibson Wealth Management said in an email. “Every COLA by the Social Security Administration is crucial. Whether it is 3% or 7%, all you’re doing is keeping up, not getting ahead.”

Planning shouldn’t be based on COLAs, Ed Snyder, co-founder of Oak Tree Advisors, said in an email.

“Inflation is a concern, but it’s better dealt with through how you have your client’s portfolios allocated,” Snyder said. “Higher stock allocations historically have given you a better chance of outpacing inflation.”

But the future of the Social Security system is also a question.

Currently, the Old-Age and Survivors Insurance trust fund is on track to exhaust its reserves by 2033. That year, people who are 57 currently will be 72, and many will be retired, the Committee for a Responsible Federal Budget stated in an analysis this week.

“As the 2024 presidential campaign ramps up, candidates are facing pressure to pledge not to touch Social Security. While this pledge is framed as ‘protecting benefits,’ it is — in reality — an implicit endorsement of a 23% across-the-board benefit cut in 2033,” the group said in an announcement. “In that year, annual benefits would be cut by $17,400 for a typical newly retired dual-income couple.”