COLA Announcement Prompts Call for Better Inflation Protection

With the new cost-of-living-adjustment set at 3.2% for 2024, retirees can expect their Social Security checks to increase by about $59 each month, starting in January. 

While the 2024 COLA is well above the 2.6% average over the past two decades, 80% of retirees believe Congress should provide a COLA that more accurately reflects the inflation affecting older adults, according to a new survey by the Senior Citizens League. 

The 2024 adjustment is lower than it was in recent years due to reduced inflation in 2023. Recipients had received increases of 8.7% for 2023 and 5.9% for 2022.  

TSCL proposed using a “senior” Consumer Price Index to determine the annual COLA. 

“If that were the law today, the COLA in 2024 would be almost a percentage point higher—4%, versus the 3.2% just announced by the Social Security Administration,” said Mary Johnson, a Social Security policy analyst for TSCL, in a statement.  

The Social Security COLA has been calculated annually using the CPI for Urban Wage Earners and Clerical Workers, but it does not survey the costs of retired households consisting of people older than 62, according to TSCL. The advocacy group argued that the SSA should factor in the CPI for the Elderly, which surveys the cost changes for those households. 

“Failing to adequately protect Social Security benefits from the effects of inflation can lead to a loss of buying power in benefits over time and lower growth in Social Security benefit income over the course of a retirement,” TSCL stated in a press release. 

Mindy Yu, director of investing for Betterment at Work, said the small increase in the COLA for 2024 serves as a reminder of the importance of building a robust and reliable retirement plan.  

“While it’s encouraging to see any of these bumps, this may not suffice for retirees who are already concerned that their retirement income won’t be enough to cover essential living expenses,” Yu said in an emailed response to questions.  

Retirees also tend to spend a larger share of their incomes on housing and medical costs, two spending categories which tend to rise more quickly than overall inflation, TSCL stated. According to annual research by TSCL, Social Security benefits have lost about 36% of their buying power since 2000. 

Philip Chao, chief investment officer at Experiential Wealth, said even though making guaranteed lifetime income an option available in defined contribution plans is gaining increased traction, most pre-retirees must rely on Social Security as the main, and for some the sole, pillar of retiree income.  

“Social Security is an important, if not vital, safety net for American workers,” Chao said in an emailed response. “We have all taken the promise of income in our old age as a certainty. The sustainability of this inflation-adjusted guaranteed income should cause us to hedge our expectations by being even more self-reliant on saving and investing for retirement.” 

Chao added that, sooner or later, the “third rail of America politics must be dealt with,” and it is likely that Social Security benefits will be continuously reduced to make the program sustainable. The issue of sustainability is important to note, given that the SSA projected that the Old-Age and Survivors Insurance Trust fund will be depleted by 2033.  

Denis Monty, vice president of planning, strategy and wealth solutions at Voya Financial, said relying on Social Security as the only income source in retirement may not be a good long-term strategy but should, rather, be considered a supplement to a broader savings plan.  

“As cost-of-living adjustments continue to fluctuate, particularly given recent years of inflation, for employees, knowing how to save and plan for the retirement lifestyle they want is critical,” Monty said in an emailed response. “While the retirement-plan industry continues to introduce new ways for participants to accumulate assets and become more comfortable managing their long-term retirement accounts, as individuals get closer to retirement and start thinking about converting their assets into an income stream, plan services and investment menus can be doing a better job of providing income-generating options.” 

Assuming COLA adjustments continue to impact how much of one’s income replacement needs can be met through Social Security, and as more retirees remain in retirement plans, Monty said plan sponsors will need to consider whether offering retirement income solutions is appropriate to meet the diverse needs of their employees.  

Yu added that plan sponsors may start to consider offering benefits that help their employees plan for a still-relatively-high-inflation environment, such as by offering aid through other non-retirement benefits, including student loan repayment programs and emergency savings. 

“A minimal COLA increase can also enhance the attractiveness of a benefits plan that helps employees fund their retirement through other vehicles like a 401(k) plan,” Yu said. “To ensure recruitment and retention, plan sponsors should communicate these benefits effectively to highlight the value they provide to employees in the absence of a huge COLA bump.”