Social Security beneficiaries will see their monthly checks increase 3.2% in 2024.
The Social Security Administration's (SSA) annual cost of living adjustment, or COLA, is designed to help offset inflation. But for many recipients, the 3.2% increase next year will not go nearly as far they hope.
Here's why.
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How the Social Security Administration calculates the COLA
The COLA is based on a measure of inflation called the consumer price index for urban wage earners, otherwise known as CPI-W.
The SSA takes the average CPI-W reading from July through September of this year and divides it by the average reading from the same period a year ago. The amount of any increase becomes the COLA for the next year. For 2024, the COLA is 3.2%.
But the cost of living for the elderly is different from what it is for younger wage earners. Notably, medical care and housing make up a much bigger portion of their expenses, while eating out and transportation account for a smaller share.
The Bureau of Labor Statistics created a different measure of inflation for the elderly, CPI-E. CPI-E weighs spending categories a bit differently than the CPI-W to more accurately reflect the cost of living for those 62 years and older.
The CPI-E average during July through September increased 4% year over year. In other words, a 3.2% increase won't cover the increased cost of living for many elderly people.
An important caveat: Housing is heavily weighted in the CPI-E, even more so than in the CPI-W. If you've paid off your home or locked in a low-rate mortgage, you won't see quite the impact of increasing housing prices. But for those who are renting or who recently got a mortgage, the expense could be substantially higher than just a year ago.
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Don't forget Medicare Part B
If you enroll in Medicare Part B for medical insurance, you'll see more money taken out of your monthly checks.
The 2024 monthly premium for Medicare Part B went up $9.80 to $174.70. That's a 6% increase.
Meanwhile, the current average monthly Social Security retirement benefit is $1,793.51. A 3.2% increase would add $57.39 to that amount, but subtracting the $9.80 increase in Medicare Part B premiums means the average beneficiary will only see an extra $47.59 in their checks. That's just a 2.7% increase.
You might owe more taxes, too
Social Security benefits become taxable when your combined income -- the sum of your adjusted gross income, nontaxable interest, and half your Social Security benefits -- exceeds a certain threshold. That threshold was set at $25,000 for single filers and $32,000 for joint filers in 1983. Those thresholds remain unchanged today.
The following table shows how much of your benefits are taxable based on combined income and filing status.
| Taxable amount | Combined Income Range (Single) | Combined Income Range (Joint) |
|---|---|---|
| 0% | <$25,000 | <$32,000 |
| Up to 50% | $25,000 to $34,000 | $32,000 to $44,000 |
| Up to 85% | >$34,000 | >$44,000 |
Data source: Social Security Administration.
With the increase in Social Security benefits, you may find more of your benefits become taxable (all else being equal). That means you'll keep even less of your Social Security COLA.
The importance of saving for retirement
The best protection you can have from Social Security not keeping up with your living expenses is your own personal retirement savings.
If you haven't saved much for retirement on your own, you'll have to find ways to cut back on your spending in some areas because Social Security doesn't always keep up with your actual cost of living. If you have retirement savings, though, you should see your portfolio balance has climbed higher in 2023.
The S&P 500 has returned about 11% over the past year, while medium-term Treasury bonds are roughly flat when factoring in coupons.
While you should use a safe withdrawal rate for determining an appropriate annual withdrawal amount, you can adjust that withdrawal amount for inflation every year. The positive returns of the stock market should give you confidence in your portfolio's ability to supplement Social Security, even when the latter isn't quite keeping up with your true cost of living.
