Smaller Social Security COLA to tighten vise on retiree budgets

The low inflation numbers reported this week may have been good news for the general economy, but they threaten to make finances even tighter next year for retirees relying on Social Security.

The U.S. Department of Labor reported Tuesday that the consumer price index — which tracks average prices for a wide variety of consumer goods — rose by 4% year-over-year in May. That marked the lowest inflationary increase seen since March 2021.

Mary Johnson, the Social Security and Medicare policy analyst at the Senior Citizens League, said that means all signs are now pointing to a fairly small cost-of-living adjustment to Social Security benefits next year. In a press release Tuesday, she and her colleagues at the advocacy group predicted the adjustment — called a COLA for short — could be a meager 2.7% in 2024.

That would be a far cry from the 8.7% bump Social Security beneficiaries received in 2023 following a year in which prices rose quickly on everything from food to housing to fuel. That increase added the average monthly Social Security benefit of $1,656 by nearly $145.

Since the COLA is pegged to inflation, it should hypothetically provide enough of a boost to Social Security checks to keep pace with further price increases in the coming year. But it's not that simple, Johnson said. 

The COLA figure, she noted, is not based on the broad Consumer Price Index but rather on the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W.  That narrower index attempts to measure price increases that are most likely to affect blue-collar workers.

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Critics have long argued the CPI-W is a poor gauge of the budgetary burdens most likely to fall on retirees. The index, they say, tends to give too little weight to the two biggest expense categories in most older Americans' budgets: healthcare and housing.

The CPI-W for May was up 3.6% year-over-year. Like the increase for the Consumer Price Index, that was the smallest bump seen since March 2021.

"The CPI-W is really about the consumer costs of younger urban wage earners," Johnson said. "It specifically disregards the costs of people who are retired and over the age of 62."

A survey the Senior Citizens League conducted of 2,275 older consumers through June 6 this year found that 22% of respondents cited housing as their top budgetary concern. Roughly three out of five said food was becoming increasingly expensive at a faster rate than anything else they spend money on.

Mark Struthers, a certified financial planner and the founder of Sona Financial in Edina, Minnesota, said he has many clients in the 45 to 60 age range. He said he and they are well aware of the danger that annual Social Security COLAs won't be enough to keep up with rising. The risks are particularly high for people who live a long time past retirement, giving inflation plenty of time to whittle away at their money's purchasing power.

"The difference between COLA and their spending inflation, especially healthcare inflation, is always an issue," Struther said. "The decrease in purchasing power is not that big of a deal over 10 years, but it is over 30."

Johnson cautioned that her 2.7% COLA for 2024 remains a prediction based on the best available data. The real figure will be calculated by averaging the CPI-W for July, August and September and then publicly announced in mid-October.