As inflation trends stabilize, predictions indicate that the rise in Social Security benefits in 2024 might not be as significant as the previous year. Current forecasts by the Senior Citizens League, a nonpartisan advocacy group, suggest a potential cost of living adjustment (COLA) of around 3%. This starkly contrasts the 8.7% increase witnessed in 2023, which was the most significant hike since the 11.2% adjustment in 1981.
Key Dates and Data Releases
The exact percentage for the 2024 inflation adjustment will be unveiled in mid-October. However, before that, another estimate is slated for release on September 13, which will factor in the latest inflation data for August.
Historical Perspective on COLA
Historically, the average inflation adjustment for Social Security benefits over the past two decades has been 2.6%. There were even instances in 2010, 2011, and 2016 when no adjustments were made. The inflation adjustments remained modest until external factors like the COVID-19 pandemic and federal stimulus payments influenced the economy.
How COLA Impacts Social Security Checks
The Social Security Act provides a specific formula for the upcoming inflation adjustment. This formula considers monthly changes for July, August, and September in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The percentage difference between this year’s third-quarter average and the previous year’s determines the COLA. If the COLA is 3%, the average monthly Social Security retirement benefit could increase by approximately $55.
Inflation Outlook for the Near Future
While inflation isn’t expected to decrease linearly, it’s anticipated to diminish gradually, especially after 11 interest rate hikes by the Federal Reserve since March 2022. However, rapid wage growth could lead to a temporary increase in inflation.
Tax Implications for Retirees
Retirees must be cautious about their 2023 tax returns, especially those with additional income sources like pensions or 401(k) savings. The taxation rules for Social Security benefits can be intricate. Depending on the combined income, retirees might have to pay income tax on up to 50% or even 85% of their Social Security benefits. The inflation-driven increase in Social Security benefits in 2023 could result in a higher total combined income, potentially leading to more taxes on these benefits.
The Real Impact of the COLA Increase
While a 3% COLA might translate to an extra $55 for some, the actual increase could differ based on individual circumstances. Moreover, the final COLA percentage is yet to be confirmed. Additionally, Medicare Part B premiums, expected to be announced later in 2023, will influence the net COLA benefit for Medicare beneficiaries.
The Bottom Line
While the anticipated COLA for 2024 might bring some relief to retirees, it’s essential to consider the broader economic context and individual circumstances. With potential changes in inflation, interest rates, and healthcare costs, retirees need to stay informed and plan accordingly.