Inflation has surged to a 3.7% annual rate for the year ending in August 2023, marking the second consecutive increase following a year of declines. This uptick, revealed in the latest update to the consumer price index by the Bureau of Labor Statistics, has significant implications for both President Joe Biden and the Federal Reserve. This is important regarding how your money will keep or loss its purchase power.
President Joe Biden been emphasizing his efforts to mitigate inflationary pressures, but the recent data shows an escalation in consumer prices. Gasoline prices, in particular, have played a pivotal role in driving up the headline inflation figure, with a remarkable 10% surge from July to August, contributing more than half to the overall increase in prices. And we’ve got to talk about how your Social Security payments and other income will be impacted.
The COLA Adjustment: How to Cope With a Rising Inflation
In light of the persistent high prices for goods and services that have contributed to the inflationary surge, Social Security recipients can anticipate a significant increase in their benefits starting in January. The Senior Citizens League has forecasted a cost-of-living adjustment (COLA) of 3.2% based on the August inflation figures. Yes, this is lower than the announced 3.7% inflation rate, but it’s still not time to panic. Experts are expecting the inflation to go down to go closer to the 3.2% of the COLA.
What is the process by which Social Security determines COLA adjustments?
The Social Security Administration (SSA) traditionally determines the COLA for Social Security payments by tracking the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers from the previous year’s third quarter to the current year’s third quarter. As inflation has remained on an upward trajectory since 2022, recipients can expect their payments to rise accordingly. The exact amount of the 2024 Social Security COLA will be confirmed on October 12, following the release of the final inflation data for the third quarter of 2023.
This index measures price changes for a variety of goods and services, including food, energy, and medical care, and is tracked by the U.S. Bureau of Labor Statistics (BLS).
The COLA is calculated by comparing the average of the CPI-W for the months of July, August, and September of the previous year with the average for the same three-month period in the current year.
How Inflation Will Impact Your Social Security Payments
First, let’s talk about a basic concept, “core inflation,” which excludes the volatile categories of food and energy, did not exhibit the same upward trajectory. In fact, it fell to 4.3% for the year ending in August. This divergence suggests that while some sectors of the economy are experiencing price spikes, others are relatively stable, which could provide some relief for the Federal Reserve System.
The Federal Reserve has been actively raising interest rates for over a year in a concerted effort to combat inflation. These measures have had a noticeable impact, with inflation receding to some extent. The central bank’s target rate currently stands at 5.25% to 5.50%, and the latest rate hike may signify the conclusion of the Fed’s tightening cycle. As they prepare for their upcoming meeting later this month, Fed officials will closely scrutinize the details of this recent report to assess the broader economic landscape.
Other Social Security Programs to Be Affected by the 2024 COLA Adjustment
The Social Security system is like a big umbrella that contemplates several programs, and all are reached by the COLA adjustment. As we previously said, Social Security retirement benefits give annual increases to retirees, to safeguard their purchasing power against inflation.
Additionally, individuals who are unable to work due to disabilities and receive Social Security Disability Insurance (SSDI) benefits also benefit from COLA adjustments, which help maintain the effectiveness of their disability benefits in addressing their needs.
Moreover, the Supplemental Security Income (SSI) program, which aids disabled individuals, including children and the elderly with limited income and resources, relies on COLA adjustments to preserve the purchasing power of its benefits.
Furthermore, when a family member eligible for Social Security benefits passes away, their survivors may qualify for survivor benefits, and these benefits are also subject to COLA adjustments to keep pace with inflation. Finally, COLA adjustments can influence the Retirement Earnings Test and the maximum earnings subject to Social Security tax, impacting both individuals and employers in the context of Social Security payroll taxes.