The Social Security cost-of-living adjustment could be 3% or less next year
- March 16, 2023
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Seniors and millions of other Social Security recipients receive an annual cost of living adjustment (COLA) designed to adjust their monthly checks for inflation. Next year that COLA could be 3% – or even lower – based on recent inflation trends, according to an early estimate by the Senior Citizens League.
The estimate is based on the 12-month moving average rate for the consumer price index for city wage and office workers (CPI-W), a basket of goods and services typically purchased by workers, according to Mary Johnson, the Social Security and Medicare Policy Analyst at the Senior Citizens League.
That 12-month moving average was declining even as inflation rose month-over-month, as it did in January, she noted. Although inflation trends could change, inflation is now moderating, despite being well above the Federal Reserve’s 2% annual target.
“Based on February’s inflation data, it looks like COLA will be below 3% and could drop into the 2% range or even lower by Q3 if that 12-month moving average continues to decline,” said in an email to CBS MoneyWatch, adding that her group will issue an official forecast for COLA 2024 in May.
The Social Security Administration says it bases its COLA on the percentage increase in CPI-W in the third quarter compared to a year ago. If there’s no increase between the two numbers, there’s no COLA adjustment, the agency says.
“It’s important to remember that inflation in 2022 was at its highest level in 40 years,” Johnson noted. “So that there is a COLA at all [in 2024]inflation should exceed that.”
She added: “There’s every chance that’s not going to happen. I’ll be happy if there is a modest COLA and then we end the year with inflation finally turning negative and prices dropping to a more typical growth pattern.”
Smallest since 2020?
A 3% COLA would be the smallest adjustment since 2020, ahead of the price hikes in 2021 and 2022 that strained household budgets and eroded the purchasing power of Social Security recipients. Social Security recipients got a COLA of 8.7% in 2023, the highest in four decades, but some seniors say that wasn’t enough to keep them out of inflation.
“Food prices have remained high and problematic,” Johnson noted. “Housing inflation is still working its way through the system.”
She added: “I’m hoping to find some improvement in purchasing power, but the slow moderation of prices may not have too much of an impact this early in the year.”
US inflation rose at an annual rate of 6% in February, slowing from the previous month, but is still stubbornly high. According to the latest government data, the CPI-W rose at an annual rate of 5.8% in the last month.
Johnson, whose forecasts are typically accurate to within a few tenths of a percentage point of the official COLA, said she relies on available U.S. Labor Department data for the CPI-W to forecast inflation, rather than estimates by the Fed or other economists.
According to forecasts by financial data firm FactSet, economists expect inflation to average 4% in 2023. Many expect inflation to moderate over the course of the year, with Goldman Sachs forecasting inflation to ease to an annual rate of 3.7% in December.