In 2024, Social Security beneficiaries’ monthly payments are projected to increase by 3.2%. The Annual Cost of Living Adjustment, known as COLA and managed by the Social Security Administration (SSA), is intended to mitigate the impact of inflation.
However, for many beneficiaries, the 3.2% increase projected for next year may not be as significant as they had hoped.
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But why is this happening, why is it not what you expected? Here are the reasons.
How the Social Security Administration calculates the COLA
The Social Security Administration’s calculation of the COLA is based on a measure of inflation called the Consumer Price Index for Urban Wage Earners, known as the CPI-W. The SSA takes the average CPI-W reading for July through September of this year and compares it to the average for the same period last year. The difference translates into the COLA for next year, settling at 3.2% for 2024.
However, the cost of living for seniors differs from that of younger wage earners. Specifically, expenses related to health care and housing account for a much more significant portion of their budgets, while expenditures on restaurants and transportation are proportionately lower.
To address this disparity, the Bureau of Labor Statistics has developed an alternative inflation measure for seniors, known as the CPI-E. The CPI-E weights spending categories slightly differently than the CPI-W, allowing it to more accurately reflect the cost of living for people age 62 and older.
The CPI-E average between July and September increased by 4% year over year, which means that a 3.2% increase will not be enough to cover the increase in the cost of living experienced by many seniors.
It is relevant to note that housing has a significant weight in the CPI-E, even more than in the CPI-W. Therefore, those who have paid for their home or have obtained a mortgage with low rates will not feel the impact of the increases in housing prices.
However, for those who rent their home or have recently acquired a mortgage, the costs are likely to be substantially higher compared to just a year ago.
Don’t forget Medicare Part B
It is important to keep Medicare Part B in mind. If you choose to enroll in Part B for health coverage, you will see a reduction in the amount of your monthly payments.
The monthly Medicare Part B premium for 2024 has increased by $9.80, totaling $174.70, a 6% increase.
Meanwhile, the average monthly Social Security retirement benefit stands at $1,793.51. If the 3.2% increase were applied, this would add $57.39 to that amount.
However, subtracting the $9.80 increase in Medicare Part B premiums, the average beneficiary would experience an increase of only $47.59 in their monthly payments. This equates to a 2.7% increase.