The cost of living adjustment (COLA) for Social Security benefits is one of the most anticipated economic announcements each year. The COLA is based on the inflation rate and aims to help Social Security beneficiaries keep up with rising prices. For 2023, the COLA was a historically high 8.7% – the fourth-largest increase since automatic adjustments were adopted in 1975.
As we look ahead to 2024, most experts expect the COLA to come down from 2022’s unusually high levels, but still be significantly above the average increase of around 2% in most years. Here is an in-depth look at the estimated 2024 Social Security COLA and what it means for beneficiaries.
What is the COLA?
COLA stands for “cost of living adjustment.” It is an annual increase in monthly Social Security and Supplemental Security Income (SSI) benefits to account for inflation.
The purpose of the COLA is to ensure that rising prices do not erode the purchasing power of these benefits. By law, the COLA is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) calculated by the Bureau of Labor Statistics.
Specifically, the COLA calculation looks at the CPI-W from the third quarter (July-September) of the last year a COLA was determined compared to the third quarter of the current year. If the index rises, benefits increase accordingly in the following year.
Why is the 2024 COLA Estimate Lower than 2023?
The 2023 COLA was 8.7%, the fourth highest increase ever, behind:
- 1981: 11.2%
- 1979: 9.9%
- 1980: 14.3%
The high adjustment for 2023 was driven by historically high inflation in 2022 stemming from supply chain disruptions, the Russian invasion of Ukraine, and the lingering effects of the COVID-19 pandemic.
But inflation has been cooling in recent months. The annual inflation rate fell from 9.1% in June to 7.7% in October 2022. While still high historically, this downward trend is expected to bring the 2024 COLA back down to a more typical level.
Here are some of the factors that will determine the 2024 COLA:
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Energy prices: Gas and oil prices surged in 2022 after Russia’s invasion of Ukraine, driving up transportation and utility costs. But crude oil prices have fallen over 25% from their 2022 peak. If they remain near current levels, it will constrain the COLA increase.
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Housing costs: Home prices and rents rose sharply in 2021 and 2022. But higher mortgage rates have slowed demand, likely leading to smaller housing cost increases in 2023.
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Food costs: Grocery prices rose 11% in 2022, the largest annual increase since 1979. High food inflation is expected to continue into 2023, but potentially at a slower pace.
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Wage growth: Rising wages push up consumer costs. However, wage growth is also decelerating, which should contribute to lower inflation.
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Federal Reserve policy: Aggressive interest rate hikes by the Fed aim to cool inflation by slowing the economy. This points to lower price increases in 2023.
What is the Estimated 2024 COLA Amount?
In October 2022, the Senior Citizens League estimated the 2024 COLA to be 8.7%, based on inflation data through September. However, this estimate will likely need to be revised downward given the improving inflation picture.
As of December 2022, most experts predict the 2024 COLA will be between 5-7%. For context, the average annual COLA increase since 2000 has been 2.3%.
The official 2024 COLA won’t be announced until October 2023 when the September CPI-W data is finalized. The Social Security Administration will then notify beneficiaries of their new benefit amount in December 2023.
Anywhere from 5-7% would be one of the highest COLAs in the past 30 years:
- 2022: 5.9%
- 2009: 5.8%
- 2008: 5.8%
- 2001: 3.5%
A 5-7% boost would increase the average retirement benefit by $150-$210 per month compared to 2023.
When Will the COLA Increase Begin?
If the COLA is between 5-7% as expected, beneficiaries will start receiving higher Social Security payments in January 2024.
However, Supplemental Security Income (SSI) recipients will see the boost slightly sooner, starting December 30, 2023.
Higher COLA amounts will also increase the maximum amount of earnings subject to Social Security payroll taxes in 2024. This means higher income earners will pay more in Social Security taxes.
Who Receives Social Security Benefits?
In November 2022, nearly 66 million Americans received a monthly Social Security benefit check, according to the SSA.
About 51 million of these are over the age of 65, including retirees, spouses, and survivors. Another 15 million are disabled workers and their dependents.
The 2024 COLA will impact all categories of Social Security beneficiaries:
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Retired workers: The largest group, accounting for around 3/4 of all beneficiaries. Their average monthly benefit as of Nov 2022 is $1,668.
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Disabled workers: Over 10 million disabled recipients who average $1,358 per month.
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Survivors: About 6 million surviving spouses and children receive benefits based on a deceased worker’s record, averaging $1,558 monthly.
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Supplemental Security Income: Federal assistance program for over 8 million low-income seniors and disabled people, who will also see COLA increases.
How Does the COLA Impact the Average Retirement Benefit?
For retired workers, the average monthly benefit as of November 2022 was $1,668. Here is how different COLA increase scenarios for 2024 would impact the average benefit:
- 5% COLA = $104 increase, new average of $1,772
- 6% COLA = $125 increase, new average of $1,793
- 7% COLA = $146 increase, new average of $1,814
Keep in mind this average includes those who retire early with lower benefits, as well as long-career workers retiring at full retirement age or later with higher benefits.
For an individual who retired at full retirement age in 2022 with the maximum benefit of $3,345, a 5% COLA would mean an increase of $167 per month in 2024.
COLA Helps Offset Higher Medicare Premiums
Aside from countering inflation, Social Security COLAs can also help cover rising Medicare Part B premiums each year. Medicare Part B covers doctor’s visits and outpatient care.
By law, Part B premiums are deducted directly from monthly Social Security checks. In 2022, the standard Part B premium was $170.10 per month.
Higher benefits from COLA increases help shield Social Security recipients from larger Medicare premium hikes in the future. So both inflation protection and healthcare cost relief are built into the adjustment.
Should Beneficiaries Expect a Higher Check Every January?
Since 1975 when automatic COLAs began, Social Security benefits have increased most years. However, there have been three instances where the COLA was zero due to low inflation:
- 2010
- 2011
- 2016
So while COLAs are expected most of the time, they are not guaranteed. When inflation runs below 2% as it did in those years, benefits can stagnate.
On the other hand, 2022 and 2023 showed that very high inflation can drive larger than average COLA increases. 2024 is currently estimated to see an above-normal boost as well.
Overall, Social Security’s annual COLA helps ensure rising prices do not erode retirees’ buying power. And while the 2024 COLA may not end up near 2023’s lofty heights, experts predict it will still be one of the largest bumps for beneficiaries in the past 20+ years.