The cost-of-living adjustment (COLA) for those on Social Security might be the highest it’s been in more than two decades due to recent inflation. Here’s what you need to know.
When inflation jumps, seniors have good reason to be concerned whether their Social Security benefits will go as far as they need. It’s important to understand how benefits may adjust, even though inflation is now retreating below 40-year highs set in 2022 and 2023.
Effective January 1, 2024, the cost-of-living adjustment (COLA) for Social Security benefits will rise 3.2%, significantly less than the 8.7% jump for 2023. In pocketbook terms, that means the average Social Security retirement benefit will increase by $59 per month to $1,906. That’s less than half of 2023’s average increase of $146 per month.
Each year, the government uses the Consumer Price Index for Urban Earners and Clerical Workers (CPI-W) data to calculate whether there will be a COLA for Social Security benefits. Official COLA numbers are generally announced in the fall.
A recent Wall Street Journal story quoting AARP data noted that 40% of Americans ages 65 and older rely on Social Security for half or more of their income, with about 14% in that age group relying on these amounts for mostly all their income.
Now the question is how well this increase will serve U.S. retirees as the Federal Reserve and other central banks around the world continue trying to get inflation under control.
Social Security announces COLA for the coming year every October based on the latest economic data available. As monthly Consumer Price Index (CPI) readings advanced throughout 2023, experts cautioned Social Security recipients that their 2024 benefits would likely be a lot lower. The Senior Citizens League—the organization known for closely predicting COLA increases in recent years—correctly pegged the 2024 increase at 3.2% days before.
Here’s what the 2024 adjustment means for seniors.
Many seniors might still be concerned that such a significant increase in 2024 COLA won’t keep up with their expenses, and some could be right based on how they’ve planned their finances.
The COLA is based on a basket of goods and services for the average American, but seniors generally have different spending needs than younger folks.
Prescription drugs are a particular cost concern for seniors who generally face higher health care costs as they grow older. A recent report by the Kaiser Family Foundation found that prices increased faster than inflation for all drugs covered by Medicare in 2020. There is some recent good news here, though.
On August 19, 2022, President Biden signed the Inflation Reduction Act, which requires the federal government to negotiate prices for some drugs covered under Medicare Parts B and D starting in 2026. This new negotiating power expands to more drugs each year, is estimated to save Medicare $98.5 billion through 2031, and is expected to also reduce Part D premiums for seniors.
And starting in 2023, the law required drug companies to pay rebates to Medicare if prices rise faster than inflation for drugs used by Medicare beneficiaries. And by 2025, the law will cap annual out-of-pocket drug costs for Part D enrollees to $2,000, which could be particularly helpful for seniors with catastrophic health issues like cancer, hepatitis C, or multiple sclerosis.
In addition to reducing Part D premiums, the new Inflation Reduction Act is projected to slow the rise of Medicare Part B premiums too. This is important because Medicare Part B premiums are deducted automatically from Social Security payments, so these premiums reduce spendable income for seniors. Medicare trustees have projected the average monthly Part B premium at $174.80 in 2024, up from $164.90 in 2023.
To learn more about Medicare and what the different “parts” cover, visit the government’s website.
Many seniors are joining the “gig economy” by driving for a ride-sharing service, renting out extra rooms in their homes, or finding other part-time jobs. With concerns about a labor shortage in the wake of the pandemic, it might be easier for seniors to find supplemental work.
If that doesn’t work for your situation, consider purchasing an annuity or another investment that offers a constant payment stream. You can even purchase an annuity contract with a guaranteed income benefit that will provide you a COLA each year and/or provide spousal benefits should a spouse die. This outcome is particularly difficult for female spouses who generally live longer, have fewer pension assets and retirement savings, and generally have lower Social Security benefits based on their work record. Ongoing health care and potential long-term care costs should also be a concern.
It’s important for spouses to evaluate their income stream individually instead of simply planning as a couple.
Part of that evaluation is how COLAs may affect future income and benefits.
And once again, you’re back to considering the tax impact of any decision you make. For example, will your Social Security be taxed if you keep working once you begin taking it? How will your income from your taxable savings and investments affect your Medicare Part B premiums, which increase at higher income levels? Remember that at age 73 you’ll be required to withdraw from your traditional individual retirement account (IRA) and 401(k) accounts, and these withdrawals are generally taxable. To mitigate making taxable withdrawals later, for some, it may make sense to investigate converting taxable retirement accounts to a Roth IRA now because the move could allow some seniors to reduce Medicare premiums in their later years.
If you’re single or married and still planning for retirement, this COLA discussion can be a reminder of the importance of planning ahead. You might even consider a delay in collecting Social Security beyond your full retirement age. Doing so can make you eligible for an additional credit of between 3% and 8%, depending on your birth year.
And women, please make sure you understand what will happen if your spouse/partner dies first. Many male spouses—even with the best intentions—fail to plan for their surviving spouse, which can leave the survivor with financial upheaval during a time of grief and transition.
Make decisions now while you can. No one wants to reach old age and be unprepared.