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Social Security cost-of-living adjustment could be 3% — or lower — next year

Increased Social Security benefits fall short
Social Security benefits fall short despite increase 02:27

Seniors and millions of others on Social Security get an annual cost-of-living adjustment (or COLA) that's geared toward aligning their monthly checks with inflation. Next year, that COLA could be 3% — or even lower — based on recent inflationary trends, according to an early estimate from the Senior Citizens League. 

The estimate is based on the 12-month average rate for the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), a basket of goods and services typically bought by workers, according to Mary Johnson, the Social Security and Medicare policy analyst at the Senior Citizens League. 

That 12-month average has been declining, even when inflation increased month-to-month as it did in January, she noted. Although inflation trends could change, price increases are now easing despite remaining well above the Federal Reserve's target of 2% annually. 

"Based on February inflation data, the COLA looks like it will be below 3% and could fall into the 2% or even lower range by the third quarter if that 12-month average continues to decline," she said in an email to CBS MoneyWatch, adding that her group will issue an official forecast for the 2024 COLA in May.

The Social Security Administration says it bases its COLA on the percentage increase in the CPI-W in the third quarter compared with the prior year. If there's no increase between the two figures, there's no COLA adjustment, the agency says. 

"It's important to remember that inflation was at the highest level in 40 years in 2022," Johnson noted. "For there to even be a COLA [in 2024], inflation would have to exceed that."

She added, "There is every chance that won't happen. I will be happy if there is a modest COLA, and then we end the year with inflation finally going negative and prices drop to a more typical growth pattern."

Smallest since 2020?

A 3% COLA would amount to the smallest adjustment since 2020, prior to the surge in prices in 2021 and 2022 that has strained household budgets and eroded Social Security recipients' purchasing power. People on Social Security received a COLA of 8.7% in 2023, the biggest in four decades, yet some seniors say that hasn't been enough to keep them ahead of inflation.

"Food prices have remained high and problematic," Johnson noted. "Housing inflation is still working its way through the system."

She added, "I'm hoping to find some improvement in buying power, but the slow moderation in prices may not have too much of an effect so early in the year."

Inflation around the U.S. rose at an annual rate of 6% in February, cooling from the prior month yet still stubbornly high. The CPI-W rose at an annual rate of 5.8% last month, according to the latest government data.

Johnson, whose forecasts tend to be accurate within a few tenths of a percentage point of the official COLA, said she relies on available data from the U.S. Labor Department for the CPI-W to project inflation, rather than on estimates from the Fed or other economists.

Economists expect inflation in 2023 to average 4%, according to forecasts gathered by financial-data company FactSet. Many expect inflation to ease over the course of the year, with Goldman Sachs forecasting that inflation will drop to an annual rate of 3.7% in December.

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