Rampant inflation made life extremely difficult for workers and retirees alike in 2022. But thankfully, inflation has been cooling nicely this year.
Granted, it's still expensive to fill up a grocery cart and put food on the table, and many people are spending more on utilities than they did in the past. But all told, inflation isn't raging quite as much these days as it was a year ago.
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That's a good thing from a consumer spending and cash flow perspective. But from a Social Security COLA perspective, it's not the best news.
Next year's COLA may not be all that impressive
At the start of 2023, seniors on Social Security saw their benefits rise by 8.7%. That COLA (cost-of-living adjustment) was the largest one to come through in decades. But 2024's COLA is shaping up to be a lot smaller based on recent inflation levels.
Social Security COLAs are based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), a subset of the more widely tracked Consumer Price Index. In June, the CPI-W rose 2.3% on an annual basis. And in light of that, the nonpartisan Senior Citizens League is now projecting that 2024's COLA will come in at 3%.
To be clear, that's far from the lowest Social Security COLA on record. In fact, there have been some years without a COLA at all. But it's also a very small raise compared to the 8.7% increase seniors got at the start of 2023.
Seniors will need to prepare
A lower COLA in 2024 might seem like a bad thing. But let's remember that COLAs are tied directly to inflation, so a smaller COLA is also an indication that living costs are not rising as much. Ideally, those two things will manage to balance themselves out so that seniors on Social Security don't get hurt financially.
At the same time, it's important for seniors to be aware of the fact that next year's COLA is looking small and prepare accordingly. That could mean socking away some extra money for the remainder of 2023 if they have the flexibility to do so.
In fact, it's a really good idea to try to stash some additional cash in savings in the coming months for one big reason. This year, seniors got a huge break when the cost of Medicare Part B didn't rise like it usually does, but rather went down. But we can't anticipate the same thing happening in 2024.
If the cost of Medicare Part B increases, it will only eat away at the limited COLA seniors on Social Security receive. So it's especially crucial to build up some cash reserves to account for that possibility.
The Social Security Administration won't be able to announce next year's COLA until mid-October. That's because COLAs are specifically based on third-quarter CPI-W data.
But based on how inflation levels seem to be trending, a lower COLA is pretty much inevitable at this point. Seniors who acknowledge that and prepare accordingly can avoid getting hurt by a smaller raise.
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