Understanding the Social Security Cost-of-Living Adjustment (COLA)
This is a critical time for Social Security recipients. What happens with inflation over the next few months will determine if they receive bigger benefits next year or not. At the crux is the cost-of-living adjustment (COLA).
As Investopedia explains, the cost-of-living adjustment is an increase made to Social Security to counteract the effects of rising prices in the economy — called inflation. COLAs are typically equal to the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) for a specific period. This index measures the average cost of common consumer goods. For 2023, the COLA was 8.7 percent due to last year’s record-high inflation.
The 2024 COLA will be announced in October, after analyzing third-quarter prices. Many analysts believe it will be remarkably less, possibly under 3 percent, because of the government’s efforts to curb inflation.
A Better COLA Calculator
The Seniors Trust, along with many other senior advocates, believes the CPI-W underestimates the effect of inflation on the senior population and believes the Consumer Price Index for the Elderly (CPI-E) should be used instead.
That’s at the core of the Social Security Expansion Act introduced by Senator Bernie Sanders. This landmark piece of legislation proposes replacing the CPI-W with the CPI-E in December 2025. According to an analysis by the Office of the Chief Actuary, as reported by The Motley Fool, “the growth in Social Security benefits would be about 1.1 percentage points higher today if the CPI-E had been used to calculate COLAs over the past decade.”
Until this bill is enacted, we will continue to use the current COLA calculator, of which we are now entering a critical period. The Social Security COLA is calculated using the CPI-W from the third quarter of the current year divided by the CPI-W from the third quarter of the prior year. The percentage of increase (if any) becomes the COLA for the following year. Quarter 3 began July 1st. So, what happens over the next few months will determine how much of a benefits increase Social Security recipients will see in 2024.
