Last year witnessed some of the highest inflation levels in over forty years, which led to an impressive 8.7% increase in Social Security benefits this year via the program’s annual cost-of-living adjustment (COLA). This adjustment provided a significant boost to retirees who have experienced a more substantial decline in their purchasing power due to the rising inflation of the past few years. Despite the persistent high consumer prices, the possibility of another substantial COLA in 2024, similar to this year’s, is diminishing rapidly. The reasons for this are explained below.
To calculate the next year’s COLA, the Social Security Administration (SSA) relies on the current year’s inflation. This involves utilizing the inflation data obtained from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which monitors the prices of consumer goods and services in a market basket commonly purchased by this particular group of the population.
Calculating the Social Security COLA A Comprehensive Guide
In order to determine the COLA for the following year, the SSA examines the CPI-W data for July, August, and September. The average CPI-W for these three months is calculated and compared to the average CPI-W for the same three months in the preceding year. The resulting percentage difference between these two averages corresponds to the COLA for the following year, though it’s important to note that the COLA can never be negative for Social Security.
As a result of the Federal Reserve’s assertive interest rate hikes in the past year, inflation has begun to decelerate. It reached a high of roughly 9% in mid-2022, but as of January 2023, the year-over-year increase in the CPI-W was around 6.25%. By February, the CPI-W had further declined and was up only about 5.8% compared to the previous year.
I anticipate that inflation will continue to decrease as the year advances since the full effects of the Fed’s rate hikes have yet to materialize in the economy. Additionally, the Fed’s preferred inflation rate is 2%, indicating that the current rate is still too high. Furthermore, the Fed has maintained its policy of raising interest rates this year, with a potential rate hike at the May meeting.
An Optimistic Perspective
While it’s challenging to make precise projections, the International Monetary Fund predicted in February that the annual inflation rate in the U.S. would decline to 3.5% by year-end. In the same vein, Kiplinger, a financial publisher, projects that annual inflation will decrease to 4% by the close of 2023. Moreover, the one-year inflation expectations of consumers dipped to 3.8% in March, according to the University of Michigan’s regular survey.
Based on the February CPI-W data and inflation projections for the end of the year, it’s possible that the CPI-W figures could decrease to the range of 3.5% to 5% in the third quarter of the year. Of course, this is merely speculation, and inflation could drop even lower. This suggests that the COLA for 2024 may be around 4% to 5%, or even lower, which is a significant difference from last year’s 8.7% increase.
Nevertheless, looking at it historically, a COLA of 4% to 5% is not a bad outcome, and retirees may still receive a reasonably good raise next year. We will need to wait and observe what transpires.
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