Social Security benefits will increase 3.2% next year — here’s what you need to know.
Social Security benefits will get a 3.2% cost-of-living adjustment (COLA) in 2024. The most obvious upside is that beneficiaries will get a little extra income. For instance, the average retired worker will receive an additional $59 per month next year.
Similarly, the most obvious downside is that beneficiaries got a much bigger pay bump in 2023. The average retired worker received an additional $146 per month this year.
However, those are not the only pros and cons of the 2024 COLA. Retired workers should also consider the good news related to potential Social Security benefit cuts, as well as the bad news related to the purchasing power of benefits.
The good news: Social Security’s 2024 COLA will not bring benefits cuts closer
Social Security benefits got a colossal 8.7% COLA in 2023, the largest pay raise for beneficiaries since 1982. For context, Ronald Reagan was president and E.T. the Extra-Terrestrial topped the domestic box office when benefits last got a bigger bump. But the colossal COLA in 2023 came at a heavy price because it accelerated the timeline to theoretical benefit cuts.
The Social Security Trustees make several assumptions during their annual financial review of the trust funds, including estimates regarding future cost-of-living increases. The 2022 Trustees Report concluded that the Social Security trust fund would become insolvent in 2035, but that projection was based on an estimated 3.8% COLA in 2023.
In hindsight, that forecast was wildly inaccurate. Social Security benefits increased nearly five percentage points more than the trustees anticipated, and that miscalculation moved possible benefit cuts forward by a full year. The 2023 Trustees Report concluded that the Social Security trust fund is now on pace to become insolvent in 2034.
Here’s the good news: The conclusions presented in the 2023 Trustees Report were based on an estimated 3.3% COLA in 2024. But Social Security benefits will only increase 3.2% next year. That means the trustees slightly overestimated this time around, so the 2024 COLA will not bring theoretical benefit cuts any closer. In other words, Congress still has a full decade to find a satisfactory solution to Social Security’s financial problems.
The bad news: Social Security’s 2024 COLA may not cover inflation
Social Security’s annual COLAs are essentially a reimbursement mechanism to compensate beneficiaries for buying power they lost in the previous year. For instance, inflation soared to a four-decade high in 2022, so Social Security benefits got the biggest COLA in four decades in 2023.
In that context, the 3.2% COLA in 2024 should reimburse beneficiaries for buying power lost to inflation in 2023. But the underlying data shows an unfavorable trend developing. While inflation (as measured by the CPI-W) reached a multiyear low of 2.3% in June 2023, it reaccelerated to 2.6% in July, 3.4% in August, and 3.6% in September. In total, CPI-W inflation increased about 4.1% through the first nine months of 2023.
Here’s the bad news: If CPI-W inflation remains unchanged or (worse yet) continues to accelerate in the coming months, the 3.2% COLA in 2024 will underestimate the impact of rising prices and fail to fully reimburse beneficiaries. In other words, unless CPI-W inflation cools substantially through the end of the year, Social Security benefits will lose some buying power.
Unfortunately, this is a wait-and-see situation. Beneficiaries should hope for the best but plan for the worst. That may entail budgeting more frugally during the upcoming holiday season.
