Starting in 2024, Social Security recipients will receive a 3.2% increase in their benefits. This increase is determined by the cost-of-living adjustment (COLA), which is calculated based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (C.P.I.-W). The COLA is determined by comparing the average inflation reading from July, August, and September of the current year with the same period from the previous year. If there is an increase in inflation, beneficiaries receive a pay bump to account for higher prices.
There is ongoing debate about whether the C.P.I.-W is the most accurate gauge for calculating Social Security adjustments. Critics argue that it does not accurately reflect the spending habits of retirees who tend to spend more on housing and healthcare. Another experimental measure, the Consumer Price Index for the Elderly (C.P.I.-E), which tracks individuals aged 62 and older, may provide a more accurate reflection of their spending patterns. If the C.P.I.-E were used to calculate adjustments, the COLA in 2024 would be higher.
While the inflation mechanism remains a topic of discussion, experts highlight the larger issue of Social Security’s impending financing shortfall. If left unaddressed, the trust fund that pays retiree benefits, financed primarily through payroll taxes, will be depleted by 2033. At that point, the program would only be able to cover 77% of total scheduled benefits. Closing the funding gap would require actions such as raising payroll taxes, expanding the income subject to these taxes, or reducing benefits. However, any changes to Social Security would require congressional approval.
According to Alicia Munnell from the Center for Retirement Research at Boston College, finding solutions to Social Security’s financial challenges is not just an intellectual exercise but a political one. Congress faces the difficult task of balancing the need to ensure the program’s financial stability while avoiding significant cuts to benefits.