The 2024 Social Security COLA numbers are starting to get real.
And a close approximation of what the actual cost-of-living adjustment will be when it is finally announced in October is starting to come into a sharper focus after today’s announcement from the Bureau of Labor Statistics that the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), the index that’s used to determine the COLA, was up 2.6% year over year.
Based on today’s data, The Senior Citizens League’s Mary Johnson said the 2024 COLA is “looking increasingly like it may be around 3%,” Johnson said, adding that the average monthly inflation rate—especially since January of this year—rose slightly (0.2%), keeping her COLA estimate at 3%. Notably, the forecast was at 2.7% back in May before she rose it to 3% last month.
“Overall, the rate of inflation in July is significantly lower than a year ago, but most older Americans are reporting that persistently high prices still affect their household budgets according to results from a new survey by TSCL.”
Actual July CPI data is important because the next year’s COLA is calculated based on inflation during this year’s third quarter—July, August, and September—as measured by the CPI-W. Inflation for those three months is added together and averaged, then compared with the third quarter average from one year ago. The percentage difference between the two is the amount of the COLA, which would be applied for beneficiary checks received starting in January 2024. The 2023 COLA computation can be found on the Social Security website.
A COLA of 3% for 2024 would raise an average monthly benefit of $1,789 by $ 53.70—well down from this year’s average increase of $146 a month after this year’s historic 8.7% COLA—the highest in more than 40 years.
Munnell forecasts 2024 COLA at 3.4%
While TSCL’s Johnson may be the go-to source for next-year COLA forecasts based on BLS dropping its monthly CPI-W inflation updates, she isn’t the only one chiming in with estimates of what the 2024 COLA will be.
On July 26, Alicia H. Munnell, director of the Center for Retirement Research at Boston College, said retirees should expect a 2024 COLA between 3.0% and 3.8%—and said, “For now, I’m going with 3.4%.” (Note that Munnell’s forecast was made before the July CPI-W data was released.)
Munnell said her range of estimates is in line with the 3.3% COLA projected by the Social Security actuaries in the 2023 Trustees Report and well below last year’s COLA of 8.7%. “My best guess is the 2024 COLA will be roughly in line with 2024 inflation,” Munnell said, adding that’s not always the case.
She writes that the COLA over the last two years has been out of sync with actual inflation: too low a COLA for 2022 (5.9% compared to CPI-W of 7.8%) and too high a COLA for 2023 (8.7% compared to a CPI-W of 6.3%). Most importantly, Munnell noted, over the two-year inflation cycle, “retirees have received the appropriate increase,” with the COLA increasing by a combined 15.1% over the past two years and inflation (as measured by CPI-W) increasing 14.6%.
Bigger COLAs can impact taxes
Findings from TSCL’s latest consumer survey suggest more than one in five Social Security beneficiaries (23%) report they paid tax on a portion of their benefits for the first time this past tax season.
The tax return for 2022 reflected last year’s 5.9% COLA increase in Social Security benefits. “We expect the number who pay tax on a portion of their Social Security benefits to jump even more as next year’s tax season reflects the 8.7% COLA increase in 2023,” Johnson said.
Under current law, Social Security payments are generally taxable for those who surpass certain income thresholds. If a beneficiary’s combined income (adjusted gross income + nontaxable interest + ½ of Social Security benefits) is above $25,000 as a single filer (or $32,000 for married couples filing jointly), they are subject to federal tax on Social Security benefits.
Depending on how far a beneficiary is over the base amount, either 50% or 85% of benefits are currently taxable. For those under the base amount, Social Security benefits are not taxable. Individuals with combined income of more than $34,000, as well as couples with more than $44,000, may pay tax on up to 85% of their benefits.
On a state level, 38 states (and Washington D.C.) do not tax Social Security income, while 12 states do tax Social Security to some degree: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, and West Virginia.
SEE ALSO:
• Why Only 1 in 10 Americans Maximize Social Security Benefits
• Latest Social Security COLA Forecast Projects Increase of 3%
• Senator Murray Calls for Tax Fairness with Social Security
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
