The Cost-of-Living Adjustment (COLA) safeguards the monthly Social Security benefits provided to seniors. Changes in the COLA are tied to the Consumer Price Index for Urban Wage Earners and Clerical Workers Index (CPI-W), which determines the inflation rate for goods and services from one year to the next, affecting millions of beneficiaries. The Bureau of Labor Statistics (BLS) releases annual CPI-W data, providing the final inflation number for the Social Security Administration (SSA) to calculate COLA.
In 2023, the average social security payment is $1,827, and the maximum at full retirement age is $3,627, increasing to $4,555 if you retire at age 70. Our estate planning attorneys explain how it all works.
The Consumer Price Index
The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) has eight major spending categories, each with subcategories, receiving a weighting to establish the movement in price that determines inflation costs. But seniors and nonprofit groups like The Senior Citizens League (TSCL) believe the CPI-W needs to do a better job of representing the actual increase in the cost of living that aging Americans face.
The spending habits of urban wage earners and clerical workers, most younger than 62, don’t represent the expenses of seniors over age 62. There is a Consumer Price Index for the Elderly with tentative data to account for the spending habits of Americans age 62 and older, but the reported statistics have limitations resulting in errors that appear to under weigh medical care and housing — the most critical inflationary expense categories of seniors.
How the COLA Works
By law, the Social Security Administration provides a cost of living increase proportionate to the increase shown in the CPI-W only, but it’s not mandatory, especially if the cost of living declines as it did in 2010, 2011, and 2016. And sometimes, the increase is offset by other factors, such as the Part B Medicare Premium increase in 2018 that negated a 2 percent COLA increase.
In 2023, Socia Security got its biggest increase in COLA since 1981 at 8.7 percent to offset the highest inflation in four decades. However, 2024 is estimated to be 3.1 percent, even though inflation rates are at 4.9. The Senior Citizens League (TSCL) explains that seniors have different spending habits than younger generations. And although inflation is slowing, a lower inflation rate doesn’t mean prices have decreased. Key items for seniors remain high. A minimum COLA threshold has been suggested to protect elderly retirement savings and help keep seniors out of poverty, but as increases aren’t mandatory, that’s not likely to happen.
Congress agrees there is a need to change how COLAs are calculated to reflect senior spending habits with greater accuracy but disagrees about how to achieve the goal. Currently, one set of regulations calculates your baseline retirement benefit, while another set of rules defines how that number will change depending on the age you choose to take your benefits. Still, other government controls determine whether or not you will receive a cost-of-living increase and the COLA percentage. The CPI-W has consistently come up short regarding data that reflects senior spending.
Preparing for Retirement
Social Security Benefits are a critical part of your retirement income and ability to live comfortably. Rising health care costs and potential long-term care needs may also affect your income. Our estate planning and elder law attorneys evaluate your financial resources and retirement goals to ensure you get quality care when you need it. You can protect your home and savings in medical emergencies.
Contact our office at (718) 979-7477 to set up a time to discuss planning opportunities.