Social Security benefits got their biggest cost-of-living adjustment in decades this year, but retired workers will probably get a much smaller raise in 2024.
The fiercest inflation in four decades tore through the U.S. economy in 2022, and the rising cost of gas, groceries, and monthly utilities put many Americans in a difficult financial position. But retired workers on Social Security were hit especially hard, because the 5.9% cost-of-living adjustment (COLA) applied to benefits last year failed to offset inflation. In other words, Social Security beneficiaries lost buying power in 2022.
Fortunately, the system is designed to course correct, and it did just that. Social Security benefits got a historic 8.7% COLA in 2023, the largest raise for retired workers in more than 40 years. That additional income has undoubtedly been a lifeline, and it could very well restore any buying power that benefits lost last year, but it also comes with a bit of bad news.
Unfortunately, after receiving two unusually large COLAs in back-to-back years, Social Security beneficiaries will likely get a much smaller raise next year.
Social Security benefits are on pace for a 3% COLA in 2024
Social Security’s annual cost-of-living adjustments are intended to protect the buying power of benefits by ensuring payouts increase at the same pace as inflation. COLAs are determined based on changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) during the third quarter (i.e., July through September).
Specifically, the third quarter CPI-W in the current year is divided by the third quarter CPI-W from the prior year, and the percent increase (if any) becomes the COLA in the following year. For instance, the CPI-W increased 8.7% in the third quarter of 2022, so Social Security benefits got an 8.7% COLA in 2023.
Of course, the data needed to determine the 2024 COLA is not yet available, but some experts have already started issuing estimates. Inflation has cooled dramatically over the past year — the CPI-W rose just 2.3% in June 2023, a material deceleration from 9.8% in June 2022 — and that trend hints at a much smaller COLA in 2024. Indeed, The Senior Citizens League estimates that Social Security recipients will only get a 3% raise next year.
What a 3% COLA would mean for Social Security beneficiaries
The Social Security program pays benefits to millions of retired workers, spouses, survivors, and disabled workers every month. The table below shows the average benefit paid to each group in June 2023, and it provides an estimated figure for 2024 based on the forecast 3% COLA.
COHORT
AVERAGE BENEFIT (JUNE 2023)
AVERAGE BENEFIT AFTER 3% COLA
Retired workers
$1,837.29
$1,892.41
Spouses of retired workers
$893.01
$919.80
Survivors
$1,451.85
$1,495.41
Disabled workers
$1,486.42
$1,531.01
DATA SOURCE: THE SOCIAL SECURITY ADMINISTRATION.
As shown above, a 3% COLA in 2024 means the average retired worker would receive an extra $55.12 in monthly benefits, while spouses would get an additional $26.79, survivors would get $43.56 more, and disabled workers would get an additional $44.59 per month.
The silver lining to a smaller COLA
Social Security recipients may be disappointed by the prospect of a smaller COLA in 2024, but there is a silver lining to the situation. Inflation has cooled so quickly over the past year that Social Security benefits have gained a significant amount of buying power. In fact, benefits are on pace to recoup all the buying power they lost last year.
The table below shows the inflation rate through the first six months of 2022 and 2023, as measured by the CPI-W.
MONTH
2022 INFLATION RATE
2023 INFLATION RATE
January
8.2%
6.3%
February
8.6%
5.8%
March
9.4%
4.5%
April
8.9%
4.6%
May
9.3%
3.6%
June
9.8%
2.3%
First-half average
9.0%
4.5%
DATA SOURCE: U.S. BUREAU OF LABOR STATISTICS.
As seen above, the CPI-W increased 9% through the first half of 2022, outstripping the 5.9% COLA by 3.1%. But the CPI-W has increased just 4.5% through the first half of 2023, meaning the 8.7% COLA overshot inflation by 4.2%.
So what? Social Security benefits lost a good deal of buying power during the first half of last year. The 2022 COLA needed to be 3.1% larger to fully offset inflation. But benefits have regained that lost buying power and then some during the first half of this year. If that trend continues, retired workers may feel like they have a little extra cash in the second half of 2023.
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