At this point of the year, just starting the second quarter of 2024, it is difficult to project exactly how much the Social Security cost of living adjustment (COLA) will be, because some important data related to inflation and, as the name says, the cost of living are missing. The COLA adjustment is an indicator used by various government entities to increase benefit and subsidy payments to beneficiaries, so that their incomes do not lose purchasing power in the face of inflation.
Several forecasts have been made and, although they are different, they agree on one thing: It is likely to be one of the lowest COLAs in recent years, after several consecutive years of significant increases that have had positive and negative impacts on Social Security beneficiaries.
Social Security COLA Forecasts: Lower Increment but Impact on Taxes for Retirees
The first forecast that we can review is that of one of the organizations that most watches over the well-being of retirees and advocates for their rights: The Senior Citizens League (TSCL), which has projected an adjustment of 2.3% in the 2025 COLA increase.
This number, says TSCL, is based on the most recent data from the US Congressional Budget Office (CBO), which marks a significant decrease compared to the 2024 index, and previous years, such as 2023, which was as high as 8.7%, one of the highest in history, or 2022 which reached 5.9%.
There have also been years when the increase was zero, or close to zero: in 2010, 2015 it was 0.0%, and in 2017 it was 0.3%.
Since 1976, when this indicator began to be measured and applied effectively, it has never moved below zero, that is, it has never reflected deflation: let’s hope that this does not happen because it would imply a reduction in the monthly amount that beneficiaries receive not only from retirement but also from other programs such as Supplemental Security Income (SSI), the federal program — part of the Social Security umbrella — that provides financial assistance to low-income individuals who are aged (65 or older), blind, or disabled.
The second forecast we must take a look at is the one made by the The National Active and Retired Federal Employees Association (NARFE), tha has determined that the upcoming Social Security COLA will be somewhere between 2,0% and 3,0%.
The CPI-W index for March 2024 was 306,502, which is an increase of 1.7 percent over the average for the third quarter of 2023, which was 301,236 (1982-84 = 100). The determination of the annual COLA is made by comparing the change in the CPI-W from one year to another, taking the average of the months of the third quarter (July, August and September).
According to current legislation, COLAS for federal retirement annuities, as well as for military retirees’ annuities and Social Security payments, are based on the Consumer Price Index for Salaried and Clerical Workers’ Workers (CPI-W), calculated by economists and statisticians of the Bureau of Labor Statistics (BLS). The CPI-W is the indicator used to measure increases in the prices of consumer goods such as food, housing, clothing, transportation, medical care, recreation, education, communications, among others.
While CSRS and Social Security COLA adjustments are based on the annual CPI-W change, FERS COLA adjustments are capped at 2 percent when CPI-W increases by 2 percent to 3 percent, and are reduced by 1 percentage point when CPI-W increases by 3 percent or more.
A Lower COLA Increase to Impact Retirees’ Taxes
The COLA increase in 2022 and 2023 had a significant impact on retirees’ taxes in 2024. In 2022, the COLA was 5.9%, the highest in almost 40 years, which increased the average monthly Social Security benefit by $92. Meanwhile, the 2023 COLA reached 8.7%, the highest since the early 1980s, increasing the average monthly profit by $146.
This COLA increase brought some retirees into income ranges subject to federal income taxes. In addition, some states and municipalities also tax Social Security benefits, and the COLA increases may have pushed some retirees to exceed the income limits for these taxes over retirement benefits, thereby increasing their tax burden.
In contrast, the COLA for 2024 was 3.2%, significantly lower than the increases of the previous two years. This has generated concern among some retirees, as the price increase has significantly exceeded that year’s COLA. As a result, the purchasing power of Social Security benefits is decreasing for retirees, which can translate into an increased financial burden, especially for those on fixed incomes who face increases in the costs of goods and services, such as healthcare and housing.
