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Photo-illustration of a social security card with numbers and math symbols.
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When Americans retire, Social Security benefits help bolster their income — and every year, the government gives the roughly 70 million recipients of those benefits a raise to bring their payments up to speed with inflation.

This cost-of-living-adjustment, abbreviated COLA, is calculated by the Social Security Administration every fall based on the average inflation for the third quarter of the year, which spans from July to September. The bigger the difference is between this and the inflation rate for the previous year, the higher the COLA will be.

Last year saw an 8.7% increase amid historic inflation from 2021 to 2022. Now that inflation has mostly cooled off, the COLA for 2024 is 3.2%.

It’s crucial for retirees to understand and keep track of changes to their Social Security benefits. Keep reading for more information on the COLA, how it’s calculated and what beneficiaries should expect going into 2024.

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What is the Social Security cost-of-living adjustment (COLA)?

As you likely know, the cost of goods and services — like groceries, housing and gas — fluctuate constantly. Retired Americans tend to be especially impacted by rising prices because they often live on fixed incomes, which can result in a gap between household expenses and their planned income from sources like a 401(k) or pension. If retirees have to take more money from their savings to afford rising costs, they run the risk of burning through those funds too soon.

Until the 1970s, Congress had to pass new legislation every time Social Security benefits required an increase. The annual rate of inflation more than doubled between 1969 and 1974, which rapidly reduced the buying power of retirees’ benefits and threatened the sustainability of their savings. That led Congress to enact legislation in 1972 that tied the COLA to the annual price changes in goods and services as measured by the consumer price index for all urban wage earners and clerical workers (CPI-W).

The provision made the yearly COLA increase automatic starting in 1975. That means that today, retirees no longer have to wait for lawmakers to agree on when and how much to increase Social Security benefits — it just happens annually.

How is the Social Security COLA calculated for retirees?

Every month, the Bureau of Labor Statistics tracks the change in prices of goods and services (like food, health care and energy) using a measure called the consumer price index for all urban consumers (CPI-U). A subset of this index, the CPI-W, is used to calculate the COLA.

That’s because the CPI-W is narrower in population size and more closely reflects price changes for goods and services specific to retired Social Security beneficiaries, who are at least 62 years old. This segment of the population is especially impacted by price increases in areas like medical care, home maintenance and transportation.

The annual COLA is determined by the average rate of inflation measured by the CPI-W in the third quarter of each fiscal year. The average third-quarter inflation rate is then compared to that of the third quarter of the last year, and the resulting difference is the COLA. (If there is no increase between the two years, retirees’ benefits remain unchanged — this occurred 2009, 2010 and 2015.)

For instance, in the third quarter of 2022, the average inflation rate for the CPI-W was 8.7% higher than it was in the third quarter of 2021. As a result, the 2023 COLA was 8.7%, the highest in four decades due to soaring inflation that began in mid-2021.

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Social Security COLA, inflation and the CPI

Although the CPI-W is a more accurate reflection of retirees’ expenses than the CPI-U, research shows that it’s often not a perfect measure of their true household costs.

A study published earlier this year from advocacy group The Senior Citizens League showed that even with 2023’s historic COLA, benefits still have not kept pace with inflation, particularly for retirees 85 and older.

The group compared the growth of COLAs from the last two decades to changes in the cost of food, medication, and other common goods and services used by retirees, finding that Social Security benefits would have been roughly $516 more a month in 2023 on average if they had increased at the same rate as inflation. What's more, the study determined that for every $100 a retired household spent on goods and services in the year 2000, the same household could only afford $64 worth with its benefits in 2023.

As such, some advocates and lawmakers are pushing for Congress to pass legislation that would change how the COLA is calculated. They argue that switching to an experimental index called the CPI-E, which measures price changes as they pertain to Americans 62 years old and up, would provide a better picture of retirees’ true spending patterns and result in a more accurate COLA.

This might sound like a simple solution to the diminishing value of Social Security benefits, but economists say adopting the CPI-E could do more harm than good in the long run.

First, this index does not always measure retiree-specific price changes more accurately than the CPI-W. Marc Goldwein, senior vice president and policy director for the nonprofit Committee for Responsible Federal Budget, previously told Money that if the CPI-E had been used to track price changes for the last two years, the COLA would have been much lower than what was calculated using the CPI-W.

In addition, the trust fund used to bankroll Social Security benefits for retirees has faced a serious insolvency threat for years that critics argue must be addressed before enacting across-the-board increases. On average, a switch to the CPI-E for COLA calculations would increase benefits by 0.2% a year but accelerate insolvency in the long-term, according to Goldwein.

Analysis by the Committee for a Responsible Federal Budget estimated that if Congress does not find a solution to the looming budget shortfall, the Old Age and Survivors Insurance (OASI) Trust Fund will run out of reserves by 2033.

It's important to note that reaching insolvency does not mean Social Security benefits will entirely go away or be slashed to zero. Instead, it would result in a universal 23% benefits reduction for retired recipients, impacting younger retirees the most.

In other words, while Social Security recipients would likely see a temporary boost to their benefits under a COLA calculated with the CPI-E, doing so before Congress reaches an agreement to fund the OASI could ultimately lower their Social Security payments down the road.

What is the Social Security COLA for next year?

Thanks in large part to the Federal Reserve's continued interest rate hikes, inflation has cooled. That means next year’s COLA of 3.2% is much lower than the 8.7% increase beneficiaries saw in 2023. Still, this is an above-average raise: Over the past two decades, the typical COLA has been 2.6%.

The 2024 COLA increases the average monthly benefit by about $58, taking the typical retiree's check to $1,907.

“Social Security and SSI benefits will increase in 2024, and this will help millions of people keep up with expenses,” Kilolo Kijakazi, acting Social Security commissioner, said in a news release.

When do Social Security payments increase due to COLA?

Social Security beneficiaries start receiving their COLA increase at the beginning of the year, so most recipients will see their first payment that includes the 2024 COLA increase in January. Recipients of Supplemental Security Income, or SSI, will see the COLA show up in the payments received Dec. 29.

This is the full Social Security schedule for 2024.

Social Security COLA history

Year-over-year inflation surged between 1975 and early 1980s, resulting in annual COLAs that ranged from 5.9% to 14.3%, the highest COLA ever recorded. Retirees saw comparatively modest increases for years until 2022, when inflation again raised the COLA to the highest levels since 1981.

Below are the annual COLAs recorded over the last decade.

year announced COLA
2012 1.7%
2013 1.5%
2014 1.7%
2015 0%
2016 0.3%
2017 2%
2018 2.8%
2019 1.6%
2020 1.3%
2021 5.9%
2022 8.7%
2023 3.2%

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