Slowing inflation is cheered by most people, but for Social Security recipients, it’s a double-edged sword.
Annual inflation cooled in May to 4%, the smallest rise since March 2021 and well off the peak of 9.1% in June last year. Energy prices fell 11.7% over that time frame, helping to keep prices in check. Even though food inflation has slowed, it was still up 6.7% over the last 12 months. Shelter, which includes rents, rose 8%, continuing to put upward pressure on headline inflation.
While investors welcomed the easing inflation and pushed up stocks after the data landed, Social Security beneficiaries may have groaned a little. Cooling inflation rate means a significantly lower cost-of-living adjustment (COLA) of 2.7% for next year, according to a forecast from The Senior Citizens League, a nonprofit seniors group. That’s less than one-third of the four-decade high of 8.7% COLA in 2023 and below last month’s estimate for a 3.1% increase for 2024.
Isn’t it OK if COLA is lower as long as inflation falls, too?
No. An ongoing survey by The Senior Citizens League with 2,275 respondents through June 6 showed older consumers are reporting little improvement in their household spending.
“While the rate of inflation has slowed, prices have remained high in certain essential categories of spending,” said Mary Johnson, Social Security and Medicare policy analyst at The Senior Citizens League.
Seniors spend their money differently. Retirees spend most of it on housing, food, transportation, utilities, and healthcare – all of which are still increasing at a quick pace. In the May inflation report, shelter costs climbed 8% over the last 12 months, food gained 6.7%, transportation services jumped 10.2%, electricity rose 5.9% and “medical care commodities”, which include prescription and nonprescription drugs and equipment and supplies, added 4.4%.
In the League’s survey, 62% of respondents said food costs were still their fastest-growing cost, while housing costs were most worrisome among 22%.
Seniors are also still reeling from 2021 and 2022 inflation
Annual COLAs are meant to ensure Social Security beneficiaries’ purchasing power isn’t eroded by inflation. However, COLA hasn’t kept pace, and seniors were the only group that saw its share of poverty increase between 2020 and 2021, the Census Bureau said.
Even though inflation this year has been running below the 8.7% beneficiaries received, they haven’t been able to recoup the losses they incurred in 2021 and 2022 when inflation reached a 40-year high, Johnson said.
“Inflation was so severe in 2021 and 2022 that the average Social Security benefit fell behind by $1,054, leaving 53% of retirees doubting they will recover because household costs rose more than the dollar amount of their COLAs,” she said.
How is COLA calculated?
Social Security Administration (SSA) bases its COLA each year on average annual increases in the consumer price index for urban wage earners and clerical workers, or CPI-W, from July through September. The CPI-W largely reflects the broad CPI that the Labor Department releases each month but differs slightly. Last month, while the CPI rose 4.0%, the CPI-W increased 3.6%.
The Seniors Citizens League uses the most recent inflation data to keep a running projection of what COLA might be next year.
How many Americans qualify for the COLA increase?
About 70 million Americans receive benefits from programs administered by SSA, with retired workers and their dependents accounting for 76.9% of benefits paid in 2022.
Nearly 9 out of 10 people aged 65 and older received a Social Security benefit as of Dec. 31. Among them, 12% of men and 15% of women rely on Social Security for 90% or more of their income.
In April, the average monthly check for Social Security beneficiaries was $1,698.05, according to SSA. A 2.7% COLA would mean about an extra $45.85 each month.
When is Social Security COLA announced?
The next COLA will be announced in October and be effective starting January 2024.