Social Security's cost-of-living increase could come in below 3% as inflation cools
Next year’s Social Security cost-of-living adjustment will likely be more than two-thirds smaller than the increase seniors enjoyed in 2023, according to new estimates, as inflation continues to cool this year.
The Senior Citizens League now estimates that the Social Security cost-of-living adjustment, or COLA, for 2024 could be 2.7% based on inflation data released Tuesday that showed consumer prices in May rose at the slowest pace since April 2021.
The estimate is far short of the 8.7% increase in benefits seniors received this year, which was the biggest increase in four decades and raised the average retiree benefit by more than $140 per month.
The smaller COLA, though, may not be enough for the more than 70 million retired senior citizens and disabled workers who are still struggling with rising prices, a persistent problem with how COLAs are measured.
“While the rate of inflation is slowing, that doesn’t always translate to lower costs for consumers — this is most especially true in the case of health care costs such as premiums and out-of-pocket costs,” Mary Johnson, Social Security and Medicare policy analyst at The Senior Citizens League, a nonpartisan group, told Yahoo Finance.
“It’s important to keep in mind that consumer prices actually have to be higher than a year ago for there to be any COLA payable at all. The fact that we are forecasting 2.7% is an indication that costs are still higher than last year. Slowing the rate of inflation simply means that prices aren't increasing as fast as a year ago.”
COLA does a ‘mediocre job’ keeping up with rising costs
Data from the Consumer Price Index (CPI) report for May showed that the headline inflation gauge increased 4% over last year – a smaller rise than the expected 4.1%. The increase is down from a peak of 9.1% last June, according to the Bureau of Labor Statistics released Tuesday morning.
But the measure that is used to calculate Social Security’s COLA — the CPI for Urban Wage Earners and Clerical Workers (CPI-W) — increased just 3.6% in the last 12 months, or 0.2% from April without a seasonal adjustment.
That could leave seniors short, says Johnson.
“Our current method of adjusting Social Security benefits tends to only do a mediocre job on that because the index that’s used to adjust benefits doesn’t track the spending patterns of retired adults over the age of 62,” Johnson said.
“Instead, it surveys the spending of younger working adults, who have different patterns of spending."
For example, the CPI-W assumes that consumers spend only 7% of their incomes on healthcare costs, Johnson said, whereas surveys of seniors conducted by her organization have found that two-thirds spend up to 29% of their incomes on healthcare costs.
In addition, older consumers are reporting little improvement in their household spending yet, according to an ongoing survey by The Senior Citizens League. While the rate of inflation has slowed, prices have remained high in certain essential categories of spending.
For instance, 62% of survey participants report food costs as their fastest-growing expenditure. Housing costs are the biggest concern for 22% of survey respondents. The most recent version surveyed 2,275 respondents through June 6, 2023.
Still, since January of this year, the actual CPI-W inflation rate has been lower than the amount older Americans received in their 2023 COLAs, translating to a small temporary improvement in buying power of roughly $52 per month for a retiree with average benefits of $1,694.00, Johnson added.
Inflation, however, was so steep in 2021 and 2022 that the average Social Security benefit fell behind by $1,054, leaving 53% of retirees doubting they will recover because household costs rose more than the dollar amount of their COLAs.
‘Still early’
The actual COLA is calculated by averaging together the CPI-W for the third quarter of the year – July, August, and September of 2023 – and then comparing that figure with the same data from last year. The Social Security Administration is expected to announce the COLA in mid-October after the release of the September consumer price index data.
Until then, this is still crystal ball time.
“This estimate is still early,” Johnson said, “and will undoubtedly change several times before the COLA is announced in October.”
Kerry Hannon is a Senior Reporter and Columnist at Yahoo Finance. She is a workplace futurist, a career and retirement strategist and the author of 14 books, including "In Control at 50+: How to Succeed in The New Work of Work" and "Never Too Old To Get Rich." Follow her on Twitter @kerryhannon.
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