Social Security and Inflation

Social Security recipients received an 8.7% increase in their benefit amounts in 2023, the largest increase since 1981. The next increase will be announced in October and will be much lower this time. Due to average monthly inflation continuing to go down from last year, the cost-of-living adjustment (COLA) is estimated to be near 3%. That would mean the average recipient would see a monthly increase of $55.

Where will you spend all this extra money? Well, in 2024, Medicare part B is also proposed to increase by nearly $10 a month, to $174.80 from the current $164.90. But Medicare part D (drug plan) is expected to decrease by 1.8% as part of the Inflation Reduction Act. That leaves you ahead of the game for a change, or so it seems. Food, energy, and shelter costs continue to go up, just at a slower pace.

Do these changes affect your financial plan? Probably not. However, it is advisable to review your income and expenses annually and be aware of changes due to inflation or lifestyle. Consider scheduling a meeting with your financial advisor to check-in on your current expenses and to make any appropriate investment changes to keep you on track.

Cost Of Living Adjustment (COLA)

Table of Contents

1 Cost Of Living Adjustment (COLA)
2 When To Start Collecting Social Security
- 2.1 Social Security Maximum Payment for 2024
3 Social Security Concerns
4 Inflation and Your Retirement Plan
- - 4.0.1 Sources:

This cost-of-living adjustment, commonly referred to as COLA, is calculated each year in the third quarter by the Social Security Administration. The committee looks at something called the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

The monthly results for the third quarter of the current year are compared to the third quarter of the prior year. The difference in this CPI-W factor is what determines how much Social Security will increase. If there is no difference, then no increase is awarded. Historical Social Security COLA data is below.

When To Start Collecting Social Security

If you haven’t started Social Security yet, there are several key items to consider. You can start as early as age 62, but your payment will be lower. Or wait until age 70 to maximize your payments. Your family health history and longevity may be a determining factor of when to start.

There are also spousal benefits and survivor benefits that can factor into your decision. To calculate your estimated payment, create a personal account on the Social Security website. COLAs are built into future payments, even if you delay taking social security.

Social Security Maximum Payment for 2024

In 2023, If you delayed taking benefits and waited until age 70 to begin collecting, the maximum payment was $4,555 per month, or $54,660 per year. That is expected to increase to $4,696 a month, or $56,352 a year in 2024.

Social Security Concerns

Social Security is a program that has supported American retirees since 1935. Retirees rely on and enjoy the benefits that it provides, yet this helpful program does not operate without challenges.

With the baby boomer generation retiring, the Social Security fund is expected to take a big hit over the next couple of decades and adjustments will need to be made. Since workers fund Social Security, a sudden drop in the number of people working will cause a drop in the funding. On top of this, the trust funds that back Social Security are projected to be lower than the funding rate in 2034, which would cause a reduction of approximately 25% of the promised benefits that everyone receives. The SS administration will more than likely meet these funding challenges by increasing the FRA and/or raising the contributions of current workers.

Inflation and Your Retirement Plan

Certainly, no one will complain about an increase in their Social Security check this coming year, but for most of us, it’s unlikely to dramatically change your lifestyle. Remember, it’s not a “pay raise” if the cost of goods and services you purchase continues to go up. It only keeps you “even” with the purchasing power of a dollar.

Having a financial plan in place to use as a benchmark for your retirement cash flow and investment strategy will better align your goals with inflation. For example, if you were to buy a 1-year treasury bond or CD that’s paying 5%, and inflation is at 3%, you’re still 2% ahead. Is that enough or have your other expenses in life gone up more than 2%? More than likely an investment strategy of both bonds and stocks will help you better prepare for inflation and lead to financial freedom and a satisfying retirement lifestyle.

Editor’s Note: This article was originally published in 2022. It has been updated to reflect the changes for 2023-2024.