At the start of 2024, seniors on Social Security saw their benefits rise 3.2%. This year's cost-of-living adjustment, or COLA, pales in comparison to the 8.7% COLA that Social Security recipients got in 2023. But it's still one of the higher COLAs to arrive over the past 10 years.
Meanwhile, the nonpartisan Senior Citizens League recently updated their 2025 COLA forecast, and their latest estimate has next year's Social Security raise coming in at 2.66%. That's not quite as generous as this year's COLA, but it reflects that inflation has slowed to a notable degree.
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The problem with Social Security COLAs, though, is that they've historically done a poor job of allowing beneficiaries to maintain their buying power in the face of inflation -- even though that's what they're specifically designed to do. But a big change may be coming to Social Security that allows COLAs to better do their intended job.
An overhaul to save Social Security
The Senior Citizens League reported last year that Social Security benefits have lost 36% of their buying power since the year 2000. And a big part of that stems from the way COLAs are calculated.
Social Security COLAs are determined using third-quarter data from the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W. When there's a rise in the index from one year to the next, benefits increase. When there's no increase, benefits remain flat. They can't decrease from one year to the next.
The problem, though, is that the CPI-W isn't highly reflective of the costs Social Security recipients tend to face. Retirees, for example, typically spend less on gas in the absence of commuting. However, they commonly spend a lot more on healthcare, due to their age.
One change that could result in higher Social Security COLAs -- and better buying power for seniors -- is a shift from basing those raises on the CPI-W to the CPI-E, or Consumer Price Index for the Elderly. President Biden, as part of his plan to strengthen Social Security, supports this change and proposed it as part of his initial presidential campaign strategy.
Biden also supports another change to Social Security that could result in more buying power for seniors -- providing a uniform increase to seniors' baseline benefit (called a PIA, or primary insurance amount) on top of inflated-based COLAs. Currently, one of the only ways a given Social Security recipient's monthly benefit will rise over time is via a COLA.
Are positive Social Security changes in the works?
President Biden knows that changes are needed to help ensure that Social Security will continue to be able to pay benefits in full. In addition to the items above, Biden is looking to change the way wages are taxed for Social Security purposes.
Currently, earnings up to a yearly wage cap are subject to Social Security taxes. But from there, workers are off the hook.
This year's wage cap is $168,600. Biden would like to see Social Security taxes reinstated for workers whose incomes exceed $400,000.
To be clear, there would be an exemption for earnings falling in between the annual wage cap and the $400,000 mark. But from there, taxes would apply once again.
This particular proposal may catch some heat, as it would directly take money out of higher earners' pockets. But a shift from the CPI-W to the CPI-E for COLA calculation purposes may be less controversial. And if that change arrives, it could put Social Security recipients in a much stronger position to keep up with their expenses.
The best way to maintain adequate buying power in retirement is to have savings to tap on top of Social Security. A retirement nest egg can not only supplement Social Security, but also be invested in a manner that beats inflation without taking on undue risk, such as a 40/60 stock/bond allocation.
Even modest gains in a conservatively invested 401(k) or IRA during retirement have the potential to outpace inflation. So those aiming for long-term financial stability should make every effort to have savings in addition to Social Security.
