The 2024 Social Security COLA could be as high as in previous years.
It’s important to point this out in order to refute the alarming rhetoric taking hold in some that next year’s cost of living adjustment (COLA) will be significantly lower than usual. Retirees and those living on a fixed income are understandably upset.
Granted, we won’t know the exact COLA until October 12, when the September CPI levels are announced. The 2024 COLA is equal to the percentage difference between the September level and the CPI level 12 months ago in September 2022.
We can only speculate at this point, but there are plenty of articles out there with scary headlines like “2024 Social Security COLA Could Be 8.7% to 2.7%”.
However, these analyzes and headlines focus on absolute rather than relative levels of COLA. And while his COLA in 2024 will almost certainly be lower than he was in 2023, inflation will also be significantly lower in absolute terms. And the relationship between the two determines whether the purchasing power of retirees is preserved or eroded.
Not focusing on this relationship is what economists call the “inflation illusion”. For illustration purposes, let’s say that the Social Security COLA for calendar year 1980 was 14.3%. If you didn’t remember the double-digit inflation rate back then, you’d be envious of how well social security recipients lived that year. In fact, these recipients most likely lost their purchasing power in 1980, as the CPI’s subsequent 12-month inflation rate was as high as his 14.6%.
Whether the 2024 COLA is higher or lower than next year’s actual inflation will depend on whether inflation is on an upward or downward trend later this year and next year. If the CPI 12-month rate of change is trending upwards, the year’s COLA will be lower than the actual inflation rate. This is because the adjustment was set in October last year when rates were low.
In contrast, if the CPI 12-month rate of change is trending downward, the COLA for a given year will more than compensate for that year’s inflation. And that seems to be the case even now. As such, the 12-month rate of change in the CPI in October this year is likely to be higher than the inflation rate we actually see in 2024.
Of course, we won’t know until the end of next year whether the 2024 Social Security COLA will be higher or lower than the actual inflation for that year. But our best guess at the moment is that 2024 is one of those years where his COLA will be slightly higher than actual inflation. So instead of complaining, retirees should be hopeful in the interim.
Over the past few years, I’ve received a number of angry emails when I made a similar point about the importance of judging the Social Security COLA in relative rather than absolute terms. Many of you have experienced genuine difficulties related to this caused by trying to pay your bills with the money you receive from Social Security, and those difficulties prove my analysis wrong. claims to be
But let me be clear, I am not taking a position on whether social security benefits per se are adequate. I’m only focused on whether Social Security’s adjustment for inflation is adequate. they are two different things.
Elderly Consumer Price Index
Before I get to the main topic, I’ll touch on a related topic. Does the Social Security Administration (SSA) use the correct measure of inflation when calculating COLA?Some people argue otherwise because the cost of living for seniors rises faster than others There are many. In theory, that argument makes a lot of sense.
However, in practice there is little difference. What we do know is that since his 1982 SSA has calculated a separate “senior consumer price index” (CPI-E) that takes into account the unique spending habits of typical seniors. Because there is As can be seen from the attached graph, that 12-month rate of change is often the same as the CPI for All Wage and Clerical Workers in Urban Areas (CPI-W ) are virtually indistinguishable from each other. Annual COLA.
The bottom line? In adjusting retirement benefits for inflation, SSA is not trying to fix all the shortcomings in how Social Security is administered. It has the narrower goal of equitably adjusting these gains by actual inflation. Its success or failure should be judged on that basis alone.
Mark Hulbert is a regular MarketWatch contributor. His Hulbert Valuation tracks investment newsletters that pay a flat fee to get audited. He can be reached at mark@hulbertrateds.com.
