Fixed income. It’s a fact of life for most retirees. However, the good news is that income isn’t completely set in stone.
Every year, the Social Security Administration (SSA) determines how much of a cost-of-living adjustment (COLA) beneficiaries will receive. The most recent adjustment was 8.7% — the highest in four decades.
But retirees shouldn’t expect such a big raise in 2024. Here’s why Social Security’s COLA could be cut in half next year.
Automatic annual COLAs didn’t become a reality until 1975. Before then, it literally took an act of Congress for Social Security benefits to be raised to reflect higher costs of living.
The past nearly five decades show several cases where a year with an especially high COLA was followed by a much smaller adjustment the following year. For example, the highest COLA before the current adjustment was 11.2%, set in 1981. One year later, the COLA was less than two-thirds of that level.
The COLA surged from 2.3% in 2007 to 5.8% in 2008. However, over the next two years, there wasn’t an adjustment at all.
It’s important to remember that COLAs are based on inflation, as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). When inflation runs rampant, the Federal Reserve raises interest rates to bring it back down. Those efforts might take some time to work, but inflation eventually declines — and so do Social Security COLAs.
The historic COLA that Social Security recipients are enjoying this year is the result of a spike in inflation in 2022. However, as in the past, the Federal Reserve raised interest rates to try to get inflation under control.
More interest rate hikes could be on the way. Inflation rose slightly in April. The Fed doesn’t want to risk a sustained resurgence.
Even with the small increase in inflation, it’s looking quite possible that the next COLA will be roughly half as much as this year’s adjustment. In April, the CPI-W increased by 4.6% year over year. That rate is only a little over half of the latest COLA of 8.7%. If inflation declines only slightly, retirees’ next cost-of-living adjustment could be cut in half.
The SSA calculates COLAs based on the average CPI-W during the third quarter compared to the previous year. There’s a good chance the Fed’s rate hikes could cause inflation to decline from current levels by Q3.
Good news, bad news
A significantly lower COLA in 2024 would actually be good news for retirees in one important way. It would mean inflation is much lower than it’s been. Social Security benefits would, therefore, have more purchasing power.
However, there could still be some bad news for retirees if the COLA is cut in half. The main problem is that the CPI-W used to determine the annual adjustments doesn’t focus on the expenses incurred by older Americans. For example, healthcare costs don’t weigh as heavily in the CPI-W as they actually do for seniors.
Some have proposed using a different inflation metric — the Consumer Price Index for the Elderly (CPI-E) — in calculating Social Security COLAs. So far, though, no action has been taken to replace the CPI-W with the CPI-E.
If you’re a retiree, your Social Security COLA for next year will likely be well below your adjustment for this year. Congratulations and condolences are perhaps both applicable.
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