As inflation has reached highs over the past year, retirees are spending more. And as a result, their Social Security benefits are increasing. The cost of living adjustment (COLA) is 8.7% in 2023, according to the Social Security Administration. And as a result, the increase is the biggest benefit hike since 1981. But that should change next year.
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Next Year’s Cost of Living Will Likely Decrease in 2024
Those receiving Social Security benefits this year will likely have to temper their expectations going forward. And that’s because next year’s COLA will likely be lower. The cost of living adjustment that is 8.7% in 2023 likely will decrease in 2024. Next year’s cost-of-living increase could be below 3%, according to the Senior Citizens League in an email to CBS Money Watch.
For March, the unadjusted annual rate of inflation was 5%. And that likely is indicating that administration officials expect to see a significant drop in the inflation rate throughout the rest of 2023. But if inflation doesn’t fall and the increase stays at 3% or lower, seniors and other benefit recipients could be caught short – again.
Inflation Concerns
In this situation with inflation, the main issue is that the cost of living adjustment is that it’s based on what happened with the inflation rate for just part of the year before. And in the meantime, people depending on Social Security benefits live with the reality of inflation happening right now.
When it comes time to do that inflation math, the Social Security benefit is adjusted in the third quarter of the year. And that’s before officials have even seen the results for the last three months of the year.
On top of that, the adjustment is made based on different figures than the ones used in the official inflation rate, which is the change between the third quarters of the similar Consumer Price Index (CPI) for Urban Wage Earners and Clerical Workers (CPI-W).
Sometimes, though, the difference works out in favor of Social Security recipients.
How Seniors Are Impacted By COLA
Among Social Security recipients, seniors can be hurt twice when cost-of-living allowances are too small. While the headline-grabbing inflation rate is calculated one way, and the Social Security adjustment uses another set of figures, seniors have their own separate inflation statistics.
And that’s called the Consumer Price Index for Americans 62 years of age. It’s otherwise called R-CPI-E, which is designed to look at changes in the purchases made by older Americans.
Bottom Line
Whatever inflation works out to be – either for the third quarter of 2023 or for the full year – consumers will doubtlessly be pleased if the figures head lower after the soaring rates of the pandemic years. Unless, of course, the efforts by the Federal Reserve to reduce inflation end up pushing the United States into a full-blown recession. In that case – as in 2009 and 2010 during the great recession – the cost-of-living adjustment drops to 0.0%.
Tips for Navigating Social Security
- Nailing down a retirement plan that includes Social Security can help you plan for the future. A financial advisor can help with this. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- COLAs are used to account for inflation, which can be a difficult concept to wrap your head around. But inflation is unavoidable, so you should have an idea of how it will affect your money. You can use SmartAsset’s inflation calculator to help track what your money will be worth in the future.
- If you’re applying for Social Security disability benefits, you’ll need to fill out form SSA-827. This provides your consent for the SSA and Disability Determination Services (DDS) to view your medical records.
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