July inflation report suggests next year’s boost likely to be around 3%, analysts say

After two years that saw Social Security cost-of-living adjustments (COLAs) soar to their highest level in four decades, beneficiaries will likely see a more modest increase in their monthly payments next year.

The inflation gauge used by the Social Security Administration (SSA) to set the annual COLA rose at a 2.6 percent annual rate for July — the first of three months the agency uses to determine the final figure, slated to be announced in October.

“Current projections are for inflation to tick up slightly in August and then again in September,” says Emerson Sprick, senior economic analyst at the Bipartisan Policy Center. He estimates the 2024 COLA will land at about 3 percent. That would boost the average Social Security retirement benefit — $1,837 a month in June 2023 — by about $55 a month in 2024.

It would also mark a significant shift from the past two years, which saw COLAs of 5.9 percent and 8.7 percent, the biggest benefit adjustments in percentage terms since the early 1980s. The inflation-fueled increases raised the average retirement benefit by $92 in 2022 and $146 this year.

Other analysts, including Preston Caldwell, a senior U.S. economist at Morningstar; Alicia Munnell, director of the Center for Retirement Research at Boston College; and Richard Johnson, director of the Urban Institute’s Program on Retirement Policy, say they expect a 2024 COLA of around 3 percent.

That “might seem like a letdown” for Social Security recipients, Sprick says, “but it’s important to note that the COLA is calculated so that it exactly offsets the price increases consumers have faced, as measured by the Consumer Price Index, since the last COLA was determined.”

“More broadly, a 3 percent COLA would be a great sign that inflation is getting under control, which is particularly important for those on fixed incomes,” he adds. “Having stable prices is highly preferable to having large COLAs.”

All forms of benefits — retirement, disabilityfamily and survivor — are affected by the COLA. The adjustment takes effect with December Social Security payments, which most beneficiaries will receive in January 2024.

How Social Security calculates the COLA

Social Security COLAs are tied to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), a measure of price changes for a selection of goods and services, including food, energy and medical care, that is reported monthly by the federal Bureau of Labor Statistics.

The CPI-W is a subset of the main Consumer Price Index, which measures a broader range of retail prices and is considered the “headline” number in reporting on inflation. (The main index ran higher in July, at 3.2 percent, up from 3 percent in June.) To determine the COLA, the SSA compares the average CPI-W for July, August and September of each year to the figure for that same period the year before.

For example, the year-on-year changes in the CPI-W for those three months in 2022 were 9.1 percent, 8.7 percent and 8.5 percent, respectively. Over the full quarter, the index was 8.7 percent higher on average than for the same period in 2021, resulting in the COLA that took effect at the start of this year.

If projections hold, next year’s benefit adjustment will be more in line with the pre-pandemic period of relatively low inflation. Through the 2000s and 2010s, the COLA averaged about 2.2 percent. If there is no inflation, there’s no COLA — that happened in 2010, 2011 and 2016. The biggest adjustment ever was 14.3 percent in 1980.

Will the COLA keep pace with inflation?

Studies by the Center for Retirement Research show that Social Security benefits generally keep up well with inflation in the long term but can lag during short-term periods of volatility, depending on whether the price index is trending up or down when the COLA is set.

For example, beneficiaries lost buying power in 2021 and 2022 when COLAs of 1.3 percent and 5.9 percent, respectively, were outpaced by surging inflation that peaked at around 9 percent in mid-2022. This year saw the opposite effect: Inflation was cooling by the time the 8.7 benefit boost took effect and has remained well below the COLA level.

While considerably smaller, this year’s COLA could have a similar effect if inflation continues to decline in 2024, as many economists predict.

“My analysis [is] that inflation is trending down, even though there was an uptick in the trailing 12-month rate of return” in July, says Mark Hulbert, a finance analyst and columnist for MarketWatch. “It’s not a huge benefit, but the fates may smile slightly in the sense that if indeed inflation continues to trend downward, then inflation for calendar 2024 is likely to be slightly less than what we will see the COLA be.”

“The good news for older people is that health care costs have actually fallen over the past 12 months. The bad news is that housing costs have gone up quite a bit,” Johnson says, citing sector-specific data from the July CPI report, issued Aug. 10. “But overall, inflation has moderated substantially since last year.”

He adds, “We don’t know how things are going to look next year, but given that the [Federal Reserve] has done so much work to raise interest rates and tame inflation, and since the Fed seems very committed to that goal, I certainly don’t expect inflation to take off in 2024.”

Another factor affecting the COLA’s value as a hedge against inflation is Medicare costs, notes Heather Schreiber, a retirement income certified professional and the writer of Heather Schreiber’s Social Security Advisor, a newsletter for financial professionals.

A rise in the Medicare Part B premium in 2024 would offset a portion of the COLA increase for Social Security recipients who have premiums deducted directly from their benefit payments, as do about 70 percent of Medicare enrollees.

In their 2023 annual report, issued in March, Medicare’s trustees estimated that the standard Part B premium paid by most enrollees would be $174.80 a month next year, up $9.90 from the current rate, but that figure is preliminary. The actual premium is usually announced in the fall.

Because they can affect premiums, “the rising costs of Alzheimer’s drugs covered by Medicare may also play a role in determining the final benefit amount for 2024,” Schreiber says.