Every year, the speculation surrounding Social Security’s cost-of-living adjustment (COLA) seems to start earlier. Recently, I received my first press call regarding the likely magnitude of the COLA for 2024.
The COLA is an automatic indexing of benefits that aims to keep up with rising prices. This feature has proven to be invaluable, especially over the past few years when inflation rates have been high.
In order to implement the COLA for the upcoming year, Social Security needs to have the necessary figures available before the end of the current year. For the 2024 adjustment, it will be based on the increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) during the third quarter of 2023 compared to the third quarter of 2022.
While we already have the 2022 number, we are still awaiting the data for July, August, and September to calculate the third quarter average for 2023. So far, we only have the June number to work with.
Given this situation, we are left with no choice but to make some assumptions. Table 1 provides an overview of what the COLA for 2024 would be if the CPI-W were to remain at its June level for the next three months. However, it is highly unlikely that this scenario will occur. A more reasonable estimation would be an average increase of 0.2 percentage points, 0.4 percentage points, and 0.6 percentage points for July, August, and September respectively. Based on this exercise, it is projected that the 2024 COLA will fall between 3.0% and 3.8%. As of now, my inclination is towards 3.4%.
These estimates are in line with the 3.3% COLA projected by the Social Security actuaries in the 2023 Trustees Report. They are also significantly lower than the COLA of 8.7% experienced last year (refer to Figure 2).
In my opinion, the 2024 COLA is likely to align more closely with the inflation rate for the same year. In contrast, the COLAs awarded in the past two years have not accurately reflected the actual inflation: 2021 saw a relatively low COLA, while 2022 had an unusually high COLA (refer to Table 2).
This pattern is an inevitable outcome of a calculation that relies on historical data. However, it is sensible to base the COLA on actual data rather than forecasts, which would require constant adjustments and corrections. Most importantly, over the entire inflation cycle, retirees have received the appropriate increase in benefits.
