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Social Security Benefits Got a Big COLA in 2023, but Retirees Should Expect a Smaller Raise in 2024

Many retired workers found themselves in a financial pinch last year as Social Security benefits lost purchasing power to inflation. The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) soared 8.5% in 2022, easily outpacing the 5.9% cost-of-living adjustment (COLA) that was applied to Social Security.

That shortfall added momentum to a problem that began one year earlier. Social Security benefits failed to keep up with inflation in 2021 as well, as the 5.3% increase in the CPI-W topped the 1.3% COLA. In total, the average retired worker benefit lost $1,054 in purchasing power in 2021 and 2022 due to the increased cost of groceries, household utilities, and other goods and services.

Fortunately, Social Security beneficiaries finally caught a break. Benefits increased 8.7% in 2023 — the largest COLA since 1982 and the fourth-largest COLA in history — and inflation has cooled significantly this year. That means Social Security payments are regaining some of the buying power they lost in prior years. But cooling inflation also portends a smaller COLA in 2024.

Here’s what retired workers should know.

Retired couple reviewing their finances with paper and calculator while seated at a table.

Image source: Getty Images.

The Senior Citizens League says the 2024 COLA could be 2.7%

Social Security’s annual cost-of-living adjustments (COLAs) are based on changes in a subcategory of the Consumer Price Index known as the CPI-W, a metric that tracks price fluctuations across eight spending categories from the perspective of hourly wage earners and office workers.

Specifically, the CPI-W from the third quarter (i.e., July through September) of the current year is divided by the CPI-W from the third quarter of the prior year, and the percent increase (if any) becomes the COLA for the next year. For example, the CPI-W increased 8.7% in the third quarter last year, so Social Security benefits got an 8.7% COLA this year.

The Labor Department publishes CPI-W readings on a monthly basis, but third-quarter data will not be available until October, which means retired workers will have to wait several months to learn about the official 2024 COLA. But the raise can be approximated with the latest CPI-W reading. Specifically, the CPI-W measured 298.392 in May, reflecting a 2.2% increase from the third quarter of 2022. That means Social Security benefits would increase by 2.2% next year if the 2024 COLA was calculated using the May CPI-W reading.

Of course, that is not the case, and inflation is unlikely to fall to zero in the coming months, so retired workers can expect a slightly bigger raise. TSCL says the 2024 COLA could be 2.7%, which is in line with the 10-year average of 2.6%.

Social Security benefits may not recoup all lost buying power this year

As discussed, Social Security payments rose 8.7% this year, but the CPI-W increased just 3.6% in May, indicating that benefits are regaining purchasing power. Unfortunately, TSCL says any purchasing power gained in 2023 is unlikely to offset the purchasing power lost since the beginning of 2021.

Specifically, TSCL believes the average retired worker benefit will overcompensate for inflation by $52 per month (or $624 for the year) in 2023. So, the situation is undoubtedly improving, but that figure still falls short of the $1,054 in purchasing power that inflation siphoned away from the average retired worker benefit since the beginning of 2021.

That said, there is no cause for alarm. This is simply how the system works. Social Security COLAs are a backward-looking mechanism meant to keep benefits in line with inflation. In other words, the COLA in any given year is supposed to offset inflation from the previous year. Unfortunately, the system is not perfect. COLAs can fall behind inflation when the CPI-W accelerates over long periods of time, which is what happened in 2021 and 2022. But the opposite is equally true. COLAs can get ahead of inflation when the CPI-W decelerates over long periods of time, and that is happening right now.

In short, it may take another year or two, but the pluses and minuses should eventually balance out.

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