How Social Security's COLA will be calculated

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How Social Security's COLA will be calculated

The need for senior citizens to receive Social Security income is a vital aspect of their existence. According to more than two decades of annual surveys conducted by national pollster Gallup, anywhere from 80% to 90% of retirees lean on their Social Security benefits in at least some capacity to make ends meet.

Given the significance of social security to older Americans'financial health, there is arguably no event more anticipated than the unveiling of the annual cost-of-living adjustment, which is right around the corner.

What is Social Security's COLA?

COLA, a tool created by Social Security, is designed to help beneficiaries maintain pace with inflation they're contending with. If the cost of a basket of goods and services rises from one year to the next, Social Security checks should increase by a commensurate amount to avoid a loss of purchasing power. COLA is the tool that is tasked with ensuring this balance.

prior to 1975, the program's COLAs were completely arbitrary and passed along by special sessions of Congress. Year-long COLA calculations have been made using the Consumer price index for urban wage earners and Clerical Workers since 1975.

The CPI-W is a inflationary index with over a half-dozen major spending categories and dozens upon dozens of subcategories, each with its own weighting. The CPI-W is boiled down to a single figure, making for easy month-to-month or year-over-year comparisons.

While the CPI - W is reported monthly by the U.S. Bureau of Labor Statistics, only readings from the third quarter factor into the cost-of-living adjustment calculation. The average CPI-W reading from the third quarter of the current year is compared to the average CPI-W reading from Q3 of the previous year. If inflation is at its highest in the current year, then beneficiaries are in line for a higher monthly benefit in the next year. The magnitude of benefit increases is simply the percentage difference between the two average Q3 CPI-W readings, rounded to the nearest tenth of a percent.

Thus far, two of the three pertinent figures have been announced-- the July and August CPI-W readings. The BLS September inflation report, which is slated to be released on Thursday, Oct. 12, 2023, at 08:30 a.m. ET, will provide the final puzzle piece needed to calculate and announce Social Security's COLA. The big reveal is just 11 days away.

The monthly pay of Social Security's more than 66 million recipients soared in 2023, an historic increase in their monthly income. This year's COLA is the largest on a percentage basis in 41 years and the largest on a nominal basis. The average retired worker saw their benefits rise by $146 per month.

So far, Suffice it to say, the 2024 Social Security COLA won't be as impactful on retirees' pocketbooks, but it should still come in above average.

Following the release of the August inflation report from the BLS, senior Social Security policy analyst Mary Johnson of The Senior Citizens League forecast a COLA of 3.2% for the upcoming year. This compares with an average COLA of 2.0 percent over the trailing 20-year period.

The cost of living is above-average with energy and shelter expenses being the two factors behind this above-average cost-of-living adjustment. Oil prices have reached their highest level in more than a year, with the price of crude oil at its highest level. The higher prices at the fuel pumps usually result in higher prices.

The shelter is the biggest cost associated with core inflation, as core inflation exempts volatile energy and food costs from the equation. With 30-year mortgage rates tipping the scales in some regions at 8%, existing home sales have cratered. Renters are also working with exceptional rental prices, while landlords are still working with top-notch rental rates. Unsurprisingly, shelter expenses for all urban consumers are up 7.3% on an unadjusted 12-month basis for the Consumer Price Index for All Urban Consumers, an inflationary index similar to the CPI-W.

A 3.2% COLA would translate into an average $59-per-month benefit hike for the average retired worker in January, according to TSCL's forecast. In 2024, the average monthly pay of workers with disabilities and survivorbeneficiaries will be soaring by $48 and $47, respectively.

However, an above-average COLA will still result in disappointment for many.

Since there have been three instances over the past 15 years where no COLA has been passed along, a COLA north of 3% will make at least somebeneficiaries happy. However, many retirees will be disappointed, one way or another, he said.

Over long periods, it has done a poor job of keeping up with inflation, which is one of the biggest problems in Social Security's annual COLA. This problem can be traced to the CPI-W.

An annual COLA is a much better deal than the completely arbitrary COLAs passed along by Congress between 1950 and 1974. As the full name of the CPI-W states, it is an inflationary index focused on the spending habits of 'urban wage earners' and clerical workers. They are primarily working-age Americans who aren't receiving a Social Security benefit, and, moreover, they spend their money very differently than the 86% of Social Security beneficiaries who are age 62 and above.

The average American spends a higher percentage of its medical care and shelter than the average individual. But since the CPI-W is centered on the spending habits of mostly working-age Americans, shelter and medical care expenses aren't being given added weighting. The purchasing power of social security income since January 2000 has been reduced by an estimated 36%, down from 36% during the period from January 2000 to January 2000. A 3.2% COLA in 2024 isn't going to make a dent in this ongoing problem.

The other source of disappointment is Medicare Part B premiums. Medicare's part B serves outpatient services.

Most Medicare patients, 65 and up--65, are automatically deducted from their monthly Social Security check, and their Part B premium is automatically deducted from their monthly Social Security check. In 2024, Medicare Part B premiums could rise by $10 to $15 per month. While the decline in Part B premiums for 2023 was rare, the expected increase in 2024 could gobble up most or all of the expected cost-of-living adjustments for lifetime low-earning workers.