Social Security Benefits: How the 2024 COLA Could Affect You

You don’t need to read the headlines to feel the impact of inflation. From prices on everyday goods to long-term investments, inflation plays a pivotal role in financial decision-making. The sentiment goes double for those in or entering retirement. Living on a fixed income as prices march upward to all-time highs can pose a challenge to making ends meet.

Luckily, Social Security benefits are not stagnant. They increase according to a cost-of-living adjustment, or COLA, to keep pace with rising costs. The COLA increase to your Social Security benefits is 3.2% for 2024.

While this may provide some relief, retirees and future retirees might consider its full impact to maintain the retirement they pictured.

Cost-of-Living Adjustments, Explained

COLAs are annual increases in Social Security benefits. Without COLAs, retirees increasingly lose buying power each year and may struggle to balance their budgets on a fixed income in the face of inflation and other rising costs. These adjustments help offset inflation year over year so that retired Americans can still afford day-to-day expenses.

COLAs have been in effect since 1972, when legislation was enacted to make these adjustments automatic, meaning they occur annually without legislation or government intervention. COLAs are calculated each year based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the previous year’s third quarter to the current year’s third quarter.

However, if there is no increase in the CPI-W, there will be no COLA for the following year.

When Can I Claim My Benefits?

You can begin to claim a reduced portion of your Social Security benefits as early as age 62 and claim full benefits at your full retirement age, which depends on the year you were born. Delaying until after your full retirement age or up to age 70 will increase your monthly benefit amount.

Future Retirees Benefit Too

A question commonly asked by future retirees and those delaying retirement benefits is whether to start benefits to capture COLA increases.

But there’s no need to change your plans to benefit from the COLA adjustments. Once you reach age 62 and are eligible for Social Security benefits, COLA increases begin to affect your benefits and grow your future payments. It’s good to know that those waiting to file to maximize Social Security benefits aren’t leaving any COLAs on the table.

How Are Social Security Benefits and COLA Changing in 2024?

The Social Security Administration has announced some changes to Social Security and COLA in 2024. The 2024 COLA for Social Security benefits will increase by 3.2%. This is compared to an 8.7% increase in 2023.

For the average retired worker receiving benefits at full retirement age, the COLA will increase their payment by $59 a month, from $1,847 to $1,906. Most Social Security beneficiaries will notice this change starting with their January 2024 payments.

How much will your payments increase? Refer to your My Social Security account, or create an account at www.ssa.gov. You will receive a letter by mail informing you of your increase.

Why Is the COLA Lower This Year?

Coming off the 8.7% increase in benefits in 2023, the 2024 3.2% COLA increase may seem modest. Plus, you’re still seeing the effects of increased prices on things like health care and housing costs. However, the adjustment is backward-looking and formula-based.

In 2023, the 8.7% COLA was the highest adjustment in over four decades, and it reflected U.S. inflation’s high mark at the end of 2022. For 2024’s adjustment, the COLA is derived from last year’s July, August and September annual inflation readings, which were 2.6%, 3.4% and 3.5%, respectively.

Will this be enough to counter inflation going into this year? There’s still uncertainty about whether the Federal Reserve has controlled levels and can get them closer to a long-term CPI of 2%. Meanwhile, some argue that Social Security’s use of CPI-W does not adequately capture the cost increases felt by older Americans, who tend to spend more on health care, housing and utilities.¹

Yet, no immediate legislation looks to change this calculation.

How Could COLAs Impact Your Finances?

COLA is meant to soften the blow of inflation. Given the uncertainty about the direction and staying power of lower inflation levels, increasing Social Security benefits could help those with a limited income.

The COLA means bigger benefits for retirees, and it could also impact:

• Medicare B premiums. If you participate in Medicare, you’ll want to account for the increase in Part B premiums, which are deducted from your Social Security benefits. The standard monthly rate for Part B in 2024 also increases from $164.90 to $174.70, offsetting your COLA gain by almost $10.

• Income taxes on Social Security. Almost half of all U.S. retirees in general owe taxes on their Social Security income. The increase in Social Security benefits may come with increased taxes owed for the year.

• Investments. With the latest adjustment, you may be able to delay selling investments and make ends meet while trying to generate income and gains through suitable investing.

• Retirement plans. If you’re nearing retirement, use the latest COLA in Social Security benefits to help assess your budget and spending in retirement.

• Financial planning decisions. Coordination between your Social Security benefits and other retirement income sources, such as taxable, tax-advantaged accounts, can help you maximize your inflation-adjusted benefits and minimize your income tax liability.

Annual cost-of-living adjustments are expected. But while inflation is still straining many retirees’ fixed incomes, any increase is a welcome change. Every little bit helps, but it’s just a slice of the pie regarding retirement planning and budgeting. If you’re seeking more help, consider reaching out to a financial planner for personalized guidance.