Social Security recipients’ monthly checks are scheduled to increase by 3.2% in 2024.
The Social Security Administration’s (SSA) Annual Cost of Living Adjustment (COLA) is designed to offset inflation. But for many beneficiaries, next year’s 3.2% hike will not be as big as they expected.
Here’s why:
Image source: Getty Images.
How the Social Security Administration calculates your COLA
COLA is based on a measure of inflation called the Consumer Price Index for Urban Salary Earners (also known as CPI-W).
SSA takes the average CPI-W measurement from July through September of this year and divides it by the average measurement for the same period last year. The increased amount will be your COLA for the following year. The COLA for 2024 is 3.2%.
However, the cost of living for seniors is different from that for young salaried workers. It’s worth noting that medical expenses and housing costs make up a large portion of spending, while eating out and transportation costs make up a smaller portion.
The Bureau of Labor Statistics has created another inflation measure for seniors, the CPI-E. The CPI-E evaluates spending categories slightly differently than the CPI-W to more accurately reflect the cost of living for those 62 and older.
The CPI-E average from July to September rose 4% year over year. In other words, a 3.2% increase will not cover the increased cost of living for many seniors.
Important note: CPI-E weights housing even higher than CPI-W. If you have paid off your home or are locked into a low-interest mortgage, you will likely feel less of an impact from rising home prices. However, for those who live in rented accommodation or have recently taken out a mortgage, expenses are likely to be significantly higher than they were just a year ago.
Image source: Getty Images.
Don’t forget Medicare Part B
If you enroll in Medicare Part B, you’ll get more money out of your monthly check.
Monthly premiums for Medicare Part B in 2024 increased by $9.80 to $174.70. This is an increase of 6%.
Meanwhile, the current average monthly Social Security retirement benefit is $1,793.51. A 3.2% increase would increase that amount by $57.39, but after subtracting the $9.80 increase in Medicare Part B premiums, the average beneficiary would only see a $47.59 increase in their check. That’s an increase of just 2.7%.
You may need to pay more taxes
Social Security benefits become taxable when your total income (adjusted gross income, tax-free interest, and half of your Social Security benefits) exceeds a certain threshold. This threshold was set in 1983 at $25,000 for single filers and $32,000 for joint filers. These standard values have not changed to this day.
The following table shows how much of your benefits are taxable based on your total income and filing status.
| Taxable amount | Total income range (single person) | 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.
When your Social Security benefits increase, more of your benefits may be taxable (all else being equal). That means you can take even less of your Social Security COLA.
The importance of saving for retirement
The best protection you can get from Social Security that doesn’t cover your living expenses is your own retirement savings.
If you haven’t saved much on your own for retirement, you’ll need to find ways to cut back on some expenses because Social Security doesn’t necessarily keep up with your actual living costs. However, if you have retirement savings, you should see your portfolio balance increase in 2023.
The S&P 500 has returned about 11% over the past year, while intermediate-term government bonds have returned about the same when coupons are taken into account.
You should use a safe withdrawal rate to determine the appropriate annual withdrawal amount, but you can also adjust the withdrawal amount annually for inflation. Positive stock market returns should give you confidence in your portfolio’s ability to supplement Social Security, even if Social Security doesn’t keep up with your actual living expenses.
