Social Security is one of the most important social programs the U.S. offers. It gives retirees a financial base that far too many wouldn't otherwise have.
One key aspect of Social Security is that its payments are adjusted for inflation. Social Security's cost-of-living adjustment (COLA) sometimes gives retirees good news, and other times it seems to fail to keep up with rising costs. Here's what recent inflation data potentially says about the 2024 COLA.
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How does the Social Security COLA work?
Social Security benefits have been adjusted for inflation every year since 1975, and it's a good thing they have. It's unreasonable to expect someone to survive off the same amount each year as inflation continues to rise.
The purchasing power of a dollar is more than 20% less than just a decade ago, so a $1,000 monthly benefit would only get you around $800 worth of purchasing power right now.
Social Security's COLA is based on the previous year's third-quarter consumer price index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W is calculated using costs from things like housing, transportation, food, clothing, and other common expenses.
Here are the last 10 Social Security COLAs:
| Year | COLA |
|---|---|
| 2023 | 8.7% |
| 2022 | 5.9% |
| 2021 | 1.3% |
| 2020 | 1.6% |
| 2019 | 2.8% |
| 2018 | 2% |
| 2017 | 0.3% |
| 2016 | 0% |
| 2015 | 1.7% |
| 2014 | 1.5% |
Data source: Social Security Administration.
How 2024's COLA is shaping up for retirees
Inflation has been abnormally high in the past couple of years. In 2022, the U.S. experienced the highest inflation levels in 40 years, and the COLA reflected it. This year's 8.7% COLA was the largest increase since 1981, when the COLA was 11.2%.
Luckily, inflation has cooled noticeably, but it's still above preferred levels. June's CPI-W was 2.3% higher than it was a year ago, causing predictions of a larger 2024 COLA than anticipated. Only the CPI-W data from the third quarter (July, August, September) is considered for calculating the COLA, but June's numbers can give an idea of where it's headed.
The Senior Citizens League (SCL), one of the country's biggest nonpartisan senior advocacy groups, estimates the 2024 COLA will be 3%. This is higher than the 2.7% estimate it had after the release of May's inflation data, so the increase could come as a bit of a surprise.
The SCL acknowledged inflation was cooling but said the average inflation rate over the past 12 months rose slightly, causing it to raise its estimates.
Will the COLA be enough for retirees?
The average monthly Social Security retirement benefit in June was $1,788. If a 3% increase happens, the average benefit will be around $1,841 monthly (about $22,100 yearly).
Financial needs vary widely in retirement, but following the 80% rule is a good guide to see how much you'll need yearly. The rule states retirees should aim to have 80% of their last working year's income in retirement to maintain their lifestyle.
Applying the 80% rule, a $1,841 monthly payout would only be ideal for someone making $2,301 monthly ($27,612 yearly). That's well below the median U.S. income, so most people will need more than that to survive in retirement.
This reaffirms the importance of using retirement accounts like a 401(k) and IRA. You can save and invest for retirement and get a tax break.
