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Social Security COLA Below 3% Looks Likely for 2024

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What You Need to Know

  • While inflation remains far above the Federal Reserve’s target, the monthly average rate of the key CPI-W index is falling.
  • If current inflation trends hold, the Social Security cost-of-living adjustment for 2024 could even be 0%.
  • The Senior Citizens League’s Mary Johnson says a small COLA would do significant financial harm to seniors who rely on the program.

If current inflation trends hold, the Social Security cost-of-living adjustment for 2024 could fall well below 3%, and depending on what happens through the third quarter, there is a decent chance that no COLA could be granted to beneficiaries next year.

This assessment was shared with ThinkAdvisor in a new interview with Mary Johnson, Social Security and Medicare policy analyst at The Senior Citizens League. As Johnson emphasized, it is important to remember that inflation was at the highest level in 40 years in 2022, resulting in a near-record 8.7% 2023 COLA.

This simple fact, given the way the Social Security Administration calculates its annual adjustment, means there’s “every chance” that next year’s COLA could be as low as 0%.

“I will be happy if there is a modest COLA, and if we end the year with inflation finally leveling off and prices dropping toward a more typical growth pattern,” Johnson says.

Johnson emphasizes that the actual outlook for the 2024 COLA remains uncertain, given the fact that inflation rates are unpredictable and the results for the third quarter will be crucial to the end figure. As such, The Senior Citizens League won’t start any official estimates of the COLA for 2024 until May, but based on February inflation data, the COLA “looks like it will be below 3% and could fall into the 2% or even lower range.”

The COLA Math

As Johnson points out, the Social Security Administration uses average inflation in the third quarter, based on the consumer price index for urban wage earners and clerical workers (referred to as the CPI-W), to calculate the benefit adjustment for the following year.

As of mid-March, Johnson says, the monthly average rate of CPI-W inflation is falling.

“Every month, I calculate the average rate over the past 12 months, in order to project third-quarter inflation for the CPI-W, which is used to calculate the COLA for the following year,” she explains. “That 12-month average has been coming down, and that was true even when month-to-month inflation rose in the short term in January and February. The big picture is that inflation has been moderating, just not as fast as the Fed and economists hoped.”

While she sees this as a less likely outcome, if the higher monthly inflation trend is sustained for several months, the COLA could range somewhat higher than the current projection, but there’s too much unknown to confidently say exactly what might happen.

How a 0% COLA May Come About

As Johnson explains, it is important to consider the fact that the only months that factor directly into the COLA calculation are those in the third quarter — i.e., July, August and September. To generate the COLA, the SSA adds the CPI-W readings from these months, then divides this totaled figure by three to get an average third-quarter reading that can then be compared with the same reading from the previous year.

Simply put, if the current-year average reading ends up lower than the previous year’s average reading, that would imply that the average price for goods and services, as measured by the CPI-W, has fallen year over year.

As Johnson recalls, this has in fact happened a handful of times since the CPI-W was introduced in 1975, and in such cases, Social Security benefits remained the same from one year to the next.

“There is no COLA in that situation, and given the sky-high inflation we saw in last year’s third quarter and the fact that inflation is moderating, if slowly, it is possible there could be no COLA in 2024,” Johnson explains. “This is probably a surprising and scary thing to hear for many seniors, because they are feeling very real pain due to a loss of purchasing power.”

(Image: David Palmer/ALM)