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Illustration of Social Security card saying COLA: Since 1975

Retirement Planning > Social Security

Fresh Inflation Data Suggests 2024 Social Security COLA Could Fall Well Below 3%

By John Manganaro

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What You Need to Know

  • If inflation continues to fall, the COLA for 2024 will likely be lower than 3%, a far cry from the near-record 8.7% increase in 2023.
  • The past two years of rapid inflation has had some far-reaching financial consequences for low- and middle-income retirees.
  • The number of people reporting they have depleted a retirement account over the past 12 months has increased to 26%.

The rate of inflation, as measured by the consumer price index that is used to calculate the annual Social Security cost-of-living adjustment (COLA), fell to 4.5% in March.

If inflation continues to fall at the current rate, it appears that the COLA for 2024 will likely be lower than 3%, says Mary Johnson, Social Security and Medicare policy analyst at The Senior Citizens League.

Johnson emphasizes that the actual outlook for the 2024 COLA remains uncertain, given the fact that inflation rates are unpredictable and the results for the third quarter will be crucial to the end figure.

As such, The Senior Citizens League won’t start any “official” estimates of the COLA for 2024 until May. However, based on the newly released March inflation data and the preceding 12 months of cooling price increases, the COLA “looks like it will be below 3% and could fall into the 2% or even lower range.”

This is similar to the projection Johnson shared with ThinkAdvisor back in mid-March, but she says another month of significant cooling in the CPI has given her even more confidence that a modest COLA is in store next year.

Recent Record COLA

According to Johnson, even with cooler inflation seen last month, higher prices continue to hurt the pocketbooks of U.S. retirees.

The good news is that the near-record 8.7% COLA increase in 2023 has exceeded the actual rate of inflation experienced by Americans in every month so far this year — by an average of 2.6%.

“That’s about $44.90 per month [in excess income] based on an average Social Security benefit of $1,694,” Johnson points out. “But, that so-called ‘cushion’ would be completely consumed by the $164.90 average per month Medicare Part B premium, which is automatically deducted from Social Security benefits.”

Ultimately, according to Johnson’s calculations, average benefits in 2023 have only recovered about $179.40 in total since the start of the year — and that’s before the deduction of the Part B premium.

Cost Concerns and Account Depletions

Johnsons says the financial impact of the past two years of rapid inflation has had some far-reaching consequences for low- and middle-income retirees.

She points to a new survey of 1,055 older Americans conducted by The Senior Citizens League, which found a sizable jump in the number of people reporting they have depleted a retirement account over the past 12 months. This number jumped from 20% in the third quarter of 2022 to 26% in the first quarter of 2023, Johnson says.

The survey also shows that the share of people who reported they carried debt on consumer credit cards for more than 90 days has climbed to 45%. This is the highest level recorded by the recurring survey, despite the recent rise in interest rates.

Johnson says Medicare premiums and out-of-pocket costs are among the fastest-growing costs in retirement, and these factors may not be adequately represented by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) — the specific index used by Social Security to set annual COLAs.

“An inflation measure that does not adequately measure and accurately accounts for the portion of income spent on health care tends to undercount the actual rate of inflation and shortchange the Social Security COLA,” Johnson says.

Americans Favor High COLAs

Even as working and retired Americans hear about the Social Security program’s significant solvency challenges, which are expected to come to a head in the mid-2030s if Congress fails to act, surveys by The Senior Citizens League find strong support for tying the COLA to an index that better reflects how older adults spend their incomes.

In other words, Johnson says, Americans support the delivery of sizable and reliable COLAs to Social Security recipients, and they broadly say they would be willing to pay more while working to ensure the adequacy of Social Security benefits.

According to Johnson, nearly three in four (72%) Americans support tying the COLA to the Consumer Price Index for the Elderly (CPI-E) to calculate the annual COLA. Based on February data, the CPI-E was 6.5% versus the same time a year ago, while the CPI-W was 5.8%.

A difference of this magnitude is usually caused by higher housing and medical costs when energy prices are dropping, Johnson says.

(Image: David Palmer/ALM)

John Manganaro

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