2024 COLA Fizzles Out

Before COVID, the annual October ritual of announcing the following year’s Cost of Living Adjustment (COLA) for Social Security recipients was a sleepy event. But since the inflationary spike that started in 2021, millions have been waiting breathlessly for the news.

A bit of historical context: Although President Franklin D. Roosevelt signed the law that enacted today’s Social Security system on August 14, 1935, it was not until decades later that Congress added an extra provision which accounted for rising prices. (Before that, benefits were increased only when Congress enacted special legislation.) The COLA provision was part of the 1972 Social Security Amendments, and automatic annual COLAs began in 1975.

The problem with COLA is that the future year’s increase is based on what happened in the previous year – and we know that conditions can change quickly. Officials use a measure of the Consumer Price Index (CPI-W), which can differ slightly from the headline or core rate that you see reported on a monthly basis. According to the BLS, “the CPI-U is a more general index and seeks to track retail prices as they affect all urban consumers,” while CPI-W is a more specialized index, which “places a slightly higher weight on food, apparel, transportation, and other goods.” The criticism of CPI-W is that the lower weight on medical care and housing are two categories that eat up a lot of a retiree’s annual budget.

Earlier this year, the nonpartisan Senior Citizens League (TSCL) released research that found that older Americans have struggled to keep pace with inflation. “The buying power of Social Security benefits finds that older adults who retired before 2000 (now age 85 and older) have lost 36 percent of their buying power and would need an extra $516.70 more per month ($6,200 more in 2023) than they are currently getting to maintain the same level of buying power as in 2000.”

Amazingly, the total loss of purchasing power includes the two decades prior to COVID, when CPI-W was muted, and the average annual COLA was 2.6 percent. That changed dramatically in 2022, with a 5.9 percent COLA increase, followed by last year’s 8.7 percent spike, which was the biggest jump in 40 years. (The record COLA occurred in 1980 at 14.3 percent.)

And now, the drumroll, the Social Security COLA for 2024 will be 3.2 percent, which means an average increase of more than $50 per month starting in January.

For those nearing retirement, the takeaway from the past five years is to be careful about life decisions that are predicated on best-case assumptions. In the ten years leading up to the pandemic, I would hear from many who were crunching retirement numbers, presuming that inflation would remain at 2 percent for decades in the future. When I would suggest choosing a higher rate of inflation, “just in case”, I was tagged as a Debbie Downer.

I get it, using a higher rate of inflation (and a lower rate of investment return), might mean that pre-retirees might have to wait a few more years to call it quits. One of the best defenses against an uncertain future, one that could see inflation rise or markets tumbling at the wrong time, is to work longer, even if it is just a few years or part-time. Not only does this allow your nest egg more time to grow, it also means that you might be able to wait to claim your Social Security benefit beyond your Full Retirement Age (66-67, depending on the year of your birth) to age 70, when you can receive credits for delaying filing that can boost retirement savings significantly.