The expected cost-of-living adjustment (COLA) for Social Security recipients is projected to fall short of adequately addressing the financial challenges faced by America’s senior population. According to Certified Financial Planner Matt Frankel, the latest COLA estimate from the Senior Citizens League, recently adjusted from 2.57% to 2.63%, does not sufficiently meet the needs of seniors. Frankel identifies two key reasons why the anticipated COLA increase will not be enough to support retirees.
How Social Security COLA Is Determined
Social Security benefits, managed by the Social Security Administration (SSA), are typically adjusted annually to align with inflation. The adjustments are based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) data from the third quarter of each year, which includes the months of July, August, and September. The primary goal of these annual increases is to ensure that Social Security benefits keep pace with rising costs of essential items such as housing, food, and healthcare.
The Issue with Medicare Part B Premiums
One significant issue raised by Frankel is that Medicare Part B premiums have been rising at a much faster rate than the COLA increases. For example, Medicare Part B premiums increased by 5.9% this year, while the COLA only rose by 3.2%. He also points to a substantial 14.5% increase in Medicare Part B premiums two years ago, one of the largest in the program’s history.
This discrepancy has created a financial shortfall for Social Security recipients. Even a significant COLA increase of 8.7% in 2023 was not sufficient to offset the high inflation experienced during the latter part of the COVID-19 pandemic. As Frankel explains, Medicare Part B premium growth often outpaces COLA increases, which reduces the disposable income of retirees. Consequently, the Social Security benefits intended to help seniors keep up with rising costs are not growing fast enough to cover these increasing expenses.
Addressing the Social Security Shortfall
To tackle this issue, Frankel and other experts advocate for changing how the COLA is calculated. One proposed solution is to use the Consumer Price Index for the Elderly (CPI-E) instead of the CPI-W. The CPI-E measures price changes based on the spending habits of Americans aged 62 and older, which is the earliest age individuals can start receiving Social Security retirement benefits. Frankel argues that the CPI-E would more accurately reflect the inflation experienced by retirees, leading to more appropriate adjustments to Social Security benefits.
For instance, using the CPI-E to calculate the COLA for 2024 would have resulted in a 4% increase in benefits, compared to the 3.2% increase based on the CPI-W. According to Frankel, using the CPI-E would be a more accurate method for measuring inflation for retirees, as it better accounts for the specific costs faced by seniors.
Legislative Efforts to Change COLA Calculations
The Social Security Administration acknowledges that the current method for determining COLA is mandated by law. The COLA is calculated based on the percentage increase in the CPI-W from the third quarter of the previous year to the third quarter of the current year.
Efforts to change this methodology have been made in the past. Earlier this year, Democratic lawmakers introduced the Boosting Benefits and COLAs for Seniors Act. This proposed legislation aims to adopt the CPI-E as the basis for calculating Social Security benefit increases. Supporters argue that this change would provide a more accurate reflection of the inflation experienced by seniors, ensuring that Social Security benefits are better aligned with the rising costs that retirees face.
The current method for calculating Social Security COLA may not sufficiently address the financial needs of seniors, especially given the faster rise in Medicare Part B premiums and other living costs.
Switching to the CPI-E could provide a more accurate measure of inflation for retirees and help ensure that Social Security benefits keep up with the actual expenses faced by America’s elderly population. As lawmakers continue to debate potential changes, the future of Social Security adjustments remains a critical issue for millions of retirees.
FAQs:
What is the current COLA estimate for Social Security in 2024?
The latest estimate for the COLA in 2024 is 2.63%, according to the Senior Citizens League.
Why is the current COLA estimate considered inadequate?
Experts believe the current COLA estimate is inadequate because it does not keep pace with the rising costs of Medicare Part B premiums and other essential expenses faced by retirees.
What is the CPI-W?
The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is the index currently used to calculate the COLA for Social Security. It measures inflation based on the spending habits of urban wage earners and clerical workers.