3 things to know about Social Security COLAs | The motley fool

Many older adults get most of their income from their monthly Social Security benefits. So naturally, Social Security recipients tend to expect a significant cost of living adjustment, or COLA, from one year to the next.

In 2023, Social Security recipients obtained a COLA of 8.7%. But the 2024 COLA will be much smaller.

The Social Security Administration (SSA) just announced that in the new year, benefits will only increase by 3.2%. Factoring in a slight increase in the cost of Medicare Part B, seniors will get a much smaller increase than they received earlier this year.

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Whether you currently receive Social Security or not, it’s important to have a good idea of ​​how the program’s COLAs work. Here are some key things you need to know.

1. They are directly linked to inflation

Social Security COLAs are based on third-quarter data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). If you’ve ever wondered why the SSA doesn’t announce COLAs until October, it’s because of the need to wait for inflation data to arrive from July to September.

Now, if you’ve been on Social Security for a while and have noticed that your COLAs aren’t really helping you keep up with inflation, you’re definitely in good company. Many high-profile advocates are pushing for a way to calculate Social Security COLAs outside of the CPI-W. The argument is that expenses typically incurred by urban wage earners and office workers are not necessarily indicative of expenses typically incurred by retirees.

In fact, there has been a move to change the way Social Security COLAs are calculated by moving to a senior-specific index, or a consumer price index for seniors. But for now, lawmakers are not rushing to approve such a change.

2. They are not guaranteed

Just as workers are not guaranteed an annual raise unless it is written into their employment contract, Social Security recipients are also not guaranteed an increase in their benefits. ‘one year after the next. In fact, there have been years where Social Security recipients got a 0% COLA, or close to it.

This is because these COLAs depend on inflation. And when there is no measurable year-over-year increase in CPI-W, there is no COLA to be had.

3. There is no such thing as a negative COLA

While it is more than possible that inflation will fall year over year, the good news is that Social Security benefits are not adjusted downward based on falling inflation. The worst that can happen is that benefits are simply not increased.

Additionally, seniors who are enrolled in both Social Security and Medicare are protected from having their benefits reduced when Part B increases arrive thanks to the safe harbor rule. Enrollees in both programs have their Medicare Part B premiums automatically deducted from their Social Security benefits. It’s possible to have a year with, say, a 0% COLA and a $10 monthly increase in the Medicare Part B cost.

Without this innocuous provision, a beneficiary in this situation could see their monthly Social Security payment decrease by $10. But thanks to this rule, a person on Social Security cannot see their monthly benefit drop from year to year, regardless of what happens with Medicare Part B.

Social Security COLAs are an important thing for seniors who rely on the program for income. It’s important to understand what goes into COLAs – and also that an increase in benefits from year to year is by no means guaranteed.

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