Each year, the Social Security Administration reevaluates its monthly payment amounts and adjusts them to account for inflation. This annual change is called the Social Security cost-of-living adjustment, or COLA.
If you’re a retiree on a fixed income who worries about managing your budget while avoiding throwing away money, the annual COLA can have major consequences for your bottom line.
Here's everything you need to know, from what the COLA is, how high 2024’s increase is likely to be, and much more.
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What is the COLA?
Starting in the 1970s, the Social Security Administration (SSA) decided to adjust monthly Social Security benefit payments to account for the year’s cost-of-living increase.
This cost-of-living adjustment (COLA) applies to every Social Security recipient, so whether you're planning for retirement or already retired, your Social Security payment will change from year to year based on the COLA.
How long has the Social Security COLA been around?
Before 1975, the Social Security cost-of-living adjustment was determined by Congress and happened only once in a while rather than once a year. After 1975, adjustments were left to the SSA and based on the Consumer Price Index.
What factors affect the COLA?
The SSA determines the year’s COLA by looking at the Consumer Price Index (CPI), which is tracked by the Bureau of Labor Statistics and calculates how much the average price of standard services and goods changes month over month.
Specifically, the COLA is based on the CPI-W, or the CPI for Urban Wage Earners and Clerical Workers.
The CPI-W is a narrower measurement than the more commonly used CPI-U, a broader measurement that considers price increases for urban consumers generally.
In contrast to the CPI-U, the CPI-W focuses on price increases that impact hourly and clerical workers in areas like food and transportation. It doesn’t focus quite as much on health care or housing costs.
What was last year’s COLA?
Because inflation was so extreme in 2022, the COLA for 2023 was 8.7%, the most significant Social Security increase in four decades. The increase meant that starting in January 2023, payments increased by an average of $146 per month.
That brought benefit totals to an average of $914 a month for single individuals and $1,371 for married individuals with spouses who were also eligible for Social Security.
What will next year’s COLA be?
Fortunately for consumers, the inflation rate started to slow down in 2023. However, slowing inflation also means a substantially lower COLA for Social Security recipients.
In July 2023, the Senior Citizens League released a brief stating they think next year’s COLA could be as low as 2.7%, which means individual retirees would have less than $55 added to their monthly benefits checks.
What is the average Social Security COLA?
For what it’s worth, the 2023 COLA was an outlier (as was the intense level of inflation). Over the last 20 years, the average Social Security COLA was just 2.6%.
So, while a 2.7% to 3% increase pales compared to 2023’s, it would still be slightly better than average.
When does the 2024 COLA take effect?
The Social Security Administration calculates the following year’s COLA in October. The change itself will take effect in December 2023, and the increased amount will be reflected in the benefits payment you receive for January 2024.
Is there a Social Security COLA every year?
There can only be a cost-of-living adjustment to Social Security payments if inflation causes a cost-of-living increase for the general American public.
While inflation tends to drive prices up year over year, this wasn’t true in 2010, 2011, or 2016. During those three years, Social Security payments stayed the same as the previous year.
What happens to the COLA if the cost of living goes down?
Even if the CPI measures a decrease in the overall cost of goods and services for the year, your Social Security benefits won’t decrease. At the very least, your benefits will stay the same.
So don’t worry about receiving a decreased payment just because prices are dropping at your local grocery store.
Does the Social Security COLA impact Medicare costs?
Medicare Part B is the section of Medicare that helps retirees pay for routine doctor’s visits, outpatient services, at-home medical equipment (like wheelchairs), and preventive care (like vaccinations).
As with other insurance plans, Medicare Part B requires the insured individual to pay a monthly premium. And if you’re a retiree receiving Social Security benefits, that premium is typically deducted directly from your benefits check before it winds up in your bank account.
However, just like the general cost of living, Medicare Part B premiums tend to increase over time. Next year, premiums are expected to go up by about 6%, which would lessen the impact of a potential 3% COLA increase.
Can retirees expect other Social Security or Medicare changes in 2024?
Along with the projected Social Security COLA increase and Medicare Part B premium increase, many retirees should expect to see changes to the amount of money they spend on prescriptions — hopefully, a change entirely for the better.
The Inflation Reduction Act of 2022 included a provision limiting the amount of money Medicare Part D beneficiaries have to pay for medications out of pocket.
By 2025, the law will impose a cap on out-of-pocket medication costs, which will hopefully help retired seniors keep more money in their wallets.
Is a 3% adjustment enough to help seniors stay afloat?
Living on a fixed income is often a challenge, even for seniors who might be doing better financially than others in their age group.
That’s doubly true during unpredictable economic times, including over the last two years when inflation drastically reduced consumers’ spending power.
Unfortunately, while a 3% increase in Social Security benefits would be a welcome boost, it probably isn’t enough to compensate for still-high prices and the mountains of debt Americans took on to cope with inflation last year.
You can probably count on an increase in your Social Security payments starting next January, which will help boost your bank account. But you shouldn’t count on receiving a bump as high as we saw in 2023.
Hopefully, last year’s dramatic inflation was a one-time event, which means the 8% increase in 2023 will likely be a one-time event, too.