COLA Updates to Come in 2024
New changes are being introduced by the Social Security Administration regarding the 2024 cost-of-living adjustment (COLA).
Recently, the Social Security Administration (SSA) announced the 2024 cost-of-living-adjustment (COLA), confirming a 3.2% increase in benefits for retirees. Like all COLA increases, this increase will be reflected in January when checks are mailed out to recipients. COLA increases are designed to help Social Security and Supplemental Security Income recipients retain buying power amid rising inflation. All increases are calculated using data from the Bureau of Labor’s Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which measures the changes in consumer prices to which certain workers are exposed.
This change, although lower than the 8.7% increase in 2023, is still significant and poses many questions. One of the most significant is to what extent tax revenues will increase. Social Security and Medicare are funded by payroll taxes, which covers salaried and wage employees but also the self-employed, who pay the tax retroactively. The Medicare payroll tax applies to all wages, but the Social Security payroll tax only applies to wages up to the taxable maximum, which is adjusted annually to take into account inflation. With this year’s adjustment, incomes of higher-earning Americans will be subject to more taxes as the maximum earnings subject to the Social Security payroll tax will grow from $160,200 to $168,600.
Another question about the COLA increase is around its impact. The average Social Security recipient will receive over $50 more per month following this year’s 3.2% increase. This will have a varied impact on beneficiaries’ pocketbooks depending on many factors, including their health care expenses, their tax withholdings, and the age at which they claimed Social Security. For example, the annual increase in Medicare Part B premiums and deductibles will eat away at some of the growth in Social Security benefits.
Both of the aforementioned considerations have led some policy experts to ask whether the COLA is a fair representation of inflation. Some argue that CPI-W overstates inflation and that the chained CPI, another measure of inflation, should be adopted to calculate the annual COLA, which would decrease annual adjustments. On the other hand, others have argued that CPI-W understates the impact of inflation on the elderly, who generally consume services, like health care, that have higher rates of inflation. For this reason, they argue that the CPI-E, which takes these differences into consideration, should be adopted. This would increase annual adjustments. Either change would have a substantial impact on Social Security’s solvency.
As inflation projections are released, COLA changes are anticipated per annum which changes the availability of resources in Social Security. It is important to keep an eye on the COLA to understand changes in taxation trends and Social Security payments to beneficiaries.