According to the Social Security Administration, the cost-of-living adjustment (COLA) for 2024 will be 3.2% based on the September Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) inflation number (see Figure 1).
Understanding the Adjustment
Some may be disappointed that this year’s COLA is smaller compared to previous years. However, it’s important to note that the adjustment is designed to counterbalance the impact of rising prices. As inflation decreases, the required adjustment also diminishes.
The Effectiveness of Social Security’s COLA
The recent years provide clear evidence that Social Security’s COLA effectively fulfills its purpose. Table 1 displays December-to-December CPI-W increases from 2020 through 2022, along with an estimated increase for 2023. The second column showcases the corresponding COLAs announced in each of those years, which become effective in the following year.
In essence, Social Security aims to compensate for a 1.4% increase in prices in 2020 by raising benefits by 1.3% in 2021. When inflation remains relatively steady, both inflation and the COLA closely align with each other.
The Impact of Inflation on Social Security COLA
When it comes to adjusting for inflation, the Cost-of-Living Adjustment (COLA) provided by Social Security can sometimes fall short in the short term. For instance, in 2021, prices soared by 7.8% from January to December, yet the COLA announced for 2022 was a mere 5.9%. Naturally, this mismatch caused quite a stir at the time. However, let’s take a look at what transpired in 2022: inflation slowed to 6.3%, but the COLA increased significantly to 8.7%. This pattern reveals that COLAs tend to start off as too small when inflation is on the rise and become excessive as inflation cools down. Ultimately, though, Social Security beneficiaries are fully compensated for inflation over the complete cycle.
Although this year’s COLA may seem relatively modest compared to our projection of price increases for 2023, I believe that inflation will likely dip below 3% next year. Consequently, the Social Security COLA announced in the fall of next year is expected to surpass actual inflation.
It’s important to recognize that Social Security’s COLA is an exceptionally valuable component of the program’s design. It has consistently offered invaluable protection, even when faced with a low inflation rate such as 2%, which erodes the purchasing power of a $1,000 benefit to a mere $600 over a span of 25 years. #The Value of Retirement Benefits That Keep Up With Prices
The Cost-of-Living Adjustment (COLA) is a vital tool in preventing the erosion of retirement benefits. However, its importance often goes unnoticed due to the lack of drama surrounding it.
One positive aspect of the current inflation spike, despite its negative impact on various aspects of our lives, is that it has shed light on the significance of having retirement benefits that can keep up with rising prices.
Although often overlooked, the COLA plays a crucial role in ensuring that retirees can maintain their standard of living and financial stability in the face of increasing costs. By adjusting pensions and other retirement benefits to match inflation, the COLA safeguards individuals from the detrimental effects of rising prices.
In a time when inflation rates are soaring and economic uncertainty looms, the value of a COLA cannot be overstated. It provides retirees with a sense of security and peace of mind, knowing that their hard-earned benefits will not be diminished by inflationary pressures.
While it may not draw attention or generate excitement, the COLA’s significance lies in its ability to preserve the purchasing power and financial well-being of retirees. As such, it warrants greater recognition and appreciation for the vital role it plays in maintaining a dignified and stable retirement.