Every year, the Social Security Administration (SSA) unveils the cost-of-living adjustment (COLA), which is applied to Social Security benefits, including those of retirees. In simple terms, COLA is an annual adjustment that increases monthly checks to help keep pace with inflation. Since 1975, Social Security has automatically provided these annual COLA increases, tying them to the yearly rise in the Consumer Price Index for Wage Earners and Clerical Workers (CPI-W). The main goal here is to preserve the purchasing power of beneficiaries.
The COLA calculation takes into account the CPI-W from the third quarter of the previous year to the third quarter of the current year. For instance, the CPI-W difference between 2021 and 2022 was 8.7%, which led to an equivalent increase in Social Security payments for 2023. This increase translated to an additional $140 per month for beneficiaries on average. But what does 2024 hold?
What Might Social Security Payments Look Like in 2024?
The COLA for 2023 was notably high due to significant inflation. However, experts anticipate a smaller increase in Social Security payments for 2024 as inflation appears to be slowing down. According to a June estimate by The Senior Citizens League, one of the nation’s largest nonpartisan senior advocacy groups, the COLA for 2024 could be around 2.7%. This estimate came after the May consumer price index data release, down from a previous prediction of a 3.1% COLA.
In May, annual inflation eased to 4%, the smallest increase since March 2021. Meanwhile, the CPI-W, which is used to calculate the COLA, rose 3.6% year-over-year, marking the lowest level since March 2021 when it stood at 3.0%.
Now, if we apply these predictions to the average monthly Social Security check (which is $1,827 in 2023), a 2.7% increase would potentially bring the average check to approximately $1,876 in 2024. To get a rough estimate of your benefits in 2024, simply add 2.7% to your current monthly payment. Remember, this calculation isn’t official. The SSA calculates payments individually each year by using a formula to determine your primary insurance amount, which then shapes the sum sent to each beneficiary.
The 2.7% COLA estimate for 2024 is preliminary and may change. The official COLA for 2024 will be announced in October this year and will come into effect in December.
How does Social Security calculate the COLA increase?
Social Security calculates the COLA (Cost-of-Living Adjustment) increase by comparing the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the average for the third quarter of the previous year to the average for the third quarter of the current year [1]. If there is an increase, it is rounded to the nearest tenth of one percent. If there is no increase or the rounded increase is zero, there is no COLA for the year.
For example, the COLA effective for December 2022 was 8.7 percent, which means that Social Security benefits will increase by 8.7 percent beginning with the December 2022 benefits, payable in January 2023 [1]. This increase is based on the comparison of the CPI-W averages between the third quarter of 2021 and the third quarter of 2022.
What is the purpose of the COLA increase?
The purpose of a COLA (Cost-of-Living Adjustment) increase is to counteract the effects of inflation and ensure that the purchasing power of Social Security and other benefits is not eroded over time. COLAs are typically determined based on the percentage increase in the Consumer Price Index (CPI) for a specific period, such as the CPI-W for urban wage earners and clerical workers. The COLA increase is calculated by applying the percentage increase in the CPI-W from the third quarter of one year to the third quarter of the following year. This increase in benefits helps individuals maintain their standard of living as the cost of goods and services rises. For example, if someone received $10,000 in Social Security benefits in 2022 and the COLA for 2023 is 8.7%, their annual benefit for 2023 would be $10,870.
To calculate the COLA increase for a specific year, you can multiply the monthly payment by the COLA percentage. For example, if the monthly payment is $1,500 and the COLA increase is 5.9%, the increase would be $88.50. Adding this to the previous year’s amount would give the new benefit amount for the current year. It’s important to note that not everyone receives a COLA increase, as it depends on the CPI-W increase. If there is no CPI-W increase, there will be no COLA increase