At 8.7%, the 2023 cost-of-living adjustment for Social Security was huge. According to the Social Security Administration (SSA), the average check for retired workers at the end of last year was $1,825. The cost-of-living adjustment (COLA) was estimated to add $145 on average to each check.
But predictions indicate that next year’s COLA may not be as high. Here’s why:
A recent study from the Bank of America Institute, a think tank within the financial institution, points to the inflation rate so far in 2023 as well as increased spending among older Americans as key indicators of what the COLA will be in the future.
The report points to a circular reason as to why elderly Americans are spending more in recent months compared to other age groups.
“One possible explanation could be the 8.7% rise in Social Security payments that was implemented in January 2023,” the study says. “This rise, which reflects a cost-of-living adjustment (COLA), benefitted older age groups in particular, through retirement benefits.”
Higher spending could signal to the Federal Reserve that inflation is tamer than it really is. And, as a result, this can cause the Fed to be less aggressive in battling it.
Why the 2024 Social Security Cost-of-Living Adjustment Will Likely Be Less
Mary Johnson, a Social Security policy analyst at the Senior Citizens League, predicts the COLA will be way less than it is right now.
“The trend is downward,” Johnson told Clark.com in an email. “I still think the COLA will be lower than 3%.”
Like the Bank of America think tank, Johnson bases her projections on the likelihood of inflation continuing to slow.
How Is COLA Calculated?
COLA is calculated from increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which measures what Americans pay for goods and services. The U.S. Bureau of Labor Statistics updates the CIP-W with new data every month.
“What makes the current rise [in the COLA] interesting is that it is high by recent history – it’s the largest in over 40 years – but also that inflation has come down quite a lot since 2022 Q3,” the report from the Bank of America Institute says. “The January rate of CPI-W inflation was 6.3% and forecasts from BofA Global Research for overall CPI inflation (% YoY) suggest it could be around 6% for 2023 Q1.”
Johnson said that the Senior Citizens League will continue to gauge and estimate what the 2024 COLA will be based on monthly consumer price data.
As for older Americans who may be continuing to spend more because of the generous 2023 COLA, now’s the time to rein in your spending.
- Watch where your money is going: Keep track of what’s coming out of your wallet so that your savings can continue to grow.
- Stay within your budget: A higher Social Security check is no reason to excessively spend.