In just a couple of weeks, every retiree who receives Social Security benefits will get a raise. Beginning in 2024, monthly payments will increase by 3.2%.
This is an annual rite of passage for Social Security recipients. The Social Security Administration (SSA) calculates the cost-of-living adjustment (COLA) for the next year in October, with the increase going into effect in the following January.
But the coming new year might not be as happy as it could be for retirees. There’s a big problem with the 2024 Social Security COLA.
The Social Security COLA is not enough
Public interest law firm Atticus recently conducted a survey of 402 Americans over age 62 who receive Social Security benefits. When survey respondents were asked about the 2024 COLA, there was little enthusiasm.
Atticus found that 62% of seniors surveyed are dissatisfied with the 3.2% benefits increase they’ll soon receive. The negativity was nearly identical between men (63% dissatisfied) and women (62% dissatisfied).
The problem is simple: Many Americans think the 2024 Social Security COLA is not enough to cover the higher prices they’re having to pay for products and services. One 74-year-old man who participated in the survey stated, “While the COLA helps, it’s insufficient against rising costs. We’re resorting to public transport, altering health insurance, and using food banks.”
A whopping 64% of seniors responding to the Atticus survey said that they planned to reduce discretionary spending to help make ends meet. Thirty-six percent revealed that they will have to cut back on essentials.
Reducing spending won’t be enough for some. Nearly 40% of the seniors participating in the survey said they plan to find work to cover the higher costs that the 2024 COLA won’t fully offset.
Three key issues with COLAs
There are three key issues at play with the Social Security COLA. Unfortunately, only one of them has a potential solution for current retirees.
Perhaps the biggest fundamental issue is that Social Security wasn’t designed to fully fund retirement. The federal program, on average, replaces around 40% of individuals’ annual pre-retirement earnings. However, many Americans retire without saving enough to cover all of their costs of living beyond what Social Security covers — especially with inflation eroding the buying power of their retirement accounts over time.
It’s smart for anyone who hasn’t retired yet to save as much as possible in IRAs and 401(k) plans to supplement Social Security. But for those who have already retired, it can be too late to make up for not saving enough earlier in their careers.
Another concern is that COLAs come after Social Security recipients have already incurred higher costs. For example, the hefty 8.7% increase in benefits for 2023 arrived too late to help seniors pay the higher bills that they encountered in 2022.
The third issue is that some experts don’t believe that the inflation metric currently used to calculate Social Security COLAs — the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) — fully reflects the higher costs experienced by seniors. In particular, they don’t think the CPI-W adequately addresses seniors’ rising healthcare costs.
This one does have a potential fix. An alternate inflation metric called the Consumer Price Index for the Elderly (CPI-E) is designed to better address the costs of medical care for seniors. While some politicians have proposed replacing the CPI-W with the CPI-E, no change has been made yet.
Seniors’ dissatisfaction runs even deeper
Atticus also discovered that seniors’ dissatisfaction with Social Security runs even deeper than the insufficient COLAs. Nearly half of respondents (48%) stated that they weren’t confident that Social Security would provide for their long-term needs. There’s a big worry about the program’s future, with 61% expressing concerns about Social Security’s solvency and long-term sustainability.
Social Security is indeed headed for insolvency if nothing is done. The program’s two trust funds will run out of money by 2033 without major reforms, according to the Congressional Budget Office. At that point, benefits would have to be slashed by 25%.
However, there could be a ray of sunshine amid all of the doom and gloom. U.S. representatives and senators know that they must do something to preserve Social Security benefits. Several ideas have already been floated that would help avoid future cuts.
Some political wheeling and dealing will almost certainly be necessary, but it seems likely that Social Security reforms will eventually be made to keep the program from running out of money. Whether or not the issues with the annual COLAs will be addressed, though, remains to be seen.