COLA and Social Security

Published on August 29, 2023

The cost-of-living adjustment for 2024 is projected to be around 3%

Given the high rate of inflation that Americans contended with last year, the cost-of-living adjustment (COLA) for Social Security benefits in 2023 was set at a near-record 8.7%. This annual adjustment, based on consumer price index data, is meant to help retirees and others who are collecting Social Security keep up with expenses. The average inflation rate in 2022 was 8% so this higher-than-usual COLA made sense, given the economic environment.

This year, we’re glad to see that high inflation is becoming a thing of the past. Statistics released by the U.S. Department of Labor in July show the annual inflation rate for the United States was 3.0% for the 12 months ended June 2023. Big difference!

COLA projection for 2024

The Senior Citizens League—an independent citizens’ action and education non-profit organization— estimates the Social Security COLA for 2024 will be 3.1%. It derives its estimate from changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). This is the same index the Social Security Administration uses, but it calculates its benefit adjustment for the following year based on average inflation in the third quarter (reflected in the CPI-W). Therefore, we won’t know the exact percentage rate of the 2024 COLA until October.

For those interested in some COLA history, the Senior Citizens League noted that over the past 23 years (January 2000 to February 2023), Social Security COLAs increased benefits by 78% with an average annual increase of 3.4%.

Where We See Inflation Right Now

This spring (April figures), Americans saw the biggest price increases in housing, gasoline, motor vehicle insurance rates, and used vehicles. Food prices (food at home) went down a little between March and April (reduced by 0.2%); food “away from home” rose slightly, 0.4%.

For those of you who love statistics and charts, CNBC has published a chart of May 2023 price changes (year-over-year), by expense category. Gasoline and health insurance prices dropped by around 20% but at the top of the increase pile are motor vehicle repair at 19.7% and motor vehicle insurance at 17.1%. So, it appears it is less expensive to fuel a vehicle but more expensive to own one this year.

How COLA and Inflation Affect Retirees

The Senior Citizens League has new research about the buying power of Social Security benefits. It’s no secret that Americans are dealing with higher prices on many items. This can hit retirees especially hard when they are relying strongly on their Social Security benefits for retirement income. The study revealed that:

• Since 2000, those benefits lost 36% of their buying power to inflation. However, in last year’s study, the buying power lost was 40% so there is a bit of an improvement in 2023 as the inflation level moderates.
• This lower buying power means retirees would need an extra $516.70 per month ($6,200 per year in 2023) to maintain their 2000 level of purchase power.
• During this same period (2000 to 2023), the cost of goods and services typical retirees purchase rose 141.4%, which averages around 6.2% annually.
  • For example, $100 spent on groceries in 2000 would only buy about $64 worth in 2023. People on a strict budget surely feel that pinch.

Plan for a More Comfortable Retirement with a Self-Directed IRA

Social Security was never meant to represent a person’s entire or majority of retirement income, but it has become that way for too many Americans facing high costs of living and low rates of savings. Even the more diligent savers among us may come up short in terms of the amount of money they’ll need for a comfortable retirement.

But taxpayers who take a long-term, proactive approach to their retirement and are comfortable making their own investment decisions can design a different future–even while building their careers and/or raising a family.

That approach is funding a self-directed IRA and including alternative assets within their plan. It’s a strategy for investors who know and understand certain assets that typical retirement plans don’t allow—and they may already be investing in outside of their existing retirement plan. Self-direction also enables account owners to build a more diverse portfolio that creates a hedge against stock market volatility (and haven’t we seen enough of that since 2000?).

For example, if you are already investing in vacation properties or hedge funds outside of your existing retirement plan, you could open a self-directed IRA and include those assets within a tax-advantaged retirement plan. If investing in royalties or commodities excites you, you can make those investments within a self-directed IRA as well—with the potential to build more lucrative retirement savings over time.

Next Generation is Here to Help

The team at Next Generation is committed to client education and service. We invite you to watch our on-demand webinars about various asset classes, schedule a complimentary education session, or sign up for our newsletter (look for the link at the top of each website page).

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Need help by phone or email? Call us at 888-857-8058 or email NewAccounts@NextGenerationTrust.com.