Social Security and Supplemental Security Income (SSI) benefits for approximately 70 million Americans will increase 3.2% starting in January 2024, far less than the previous two years’ 5.9% and 8.7%, for 2022 and 2023 respectively, but not surprising considering the reduction in inflation over the past two years. Recall that the headline Consumer Price Index (CPI) hit its recent high mark of 9.1% in June 2022, but is now at a much tamer 3.7% as of September 2023.
The annual cost-of-living adjustment (COLA) is based on the average annual inflation rate for July, August and September. In essence, to calculate a COLA, the Social Security Administration (SSA) compares the average CPI (actually, CPI-W) for the third quarter of the current year to the average CPI of the third quarter for the last year that a COLA was approved, with the difference representing the increase in benefits starting the following January.
How does an increase of 3.2% translate into actual dollars? For those fortunate enough to collect the maximum benefit of $4,555, that will mean an additional $145.76 per month. However, for the average American who is collecting $1,706 per month, the increase will be a little under $55 per month.
Any increase is nonetheless welcome news, especially for retirees that rely heavily on Social Security and may be struggling with the higher cost of groceries, gas and healthcare among other goods and services. The Social Security Administration reports that about 20% of married couples, and 40% of singles, receive at least 90% of their income from social security alone, so this is a significant announcement for many.
There are also changes coming to the Medicare program, as the Medicare Part B standard monthly premium will rise to $174.70 for 2023, from the current $164.90 premium, representing a 6% increase. In addition, the annual deductible for all Medicare Part B beneficiaries will rise to $240 in 2024, for an increase of $14 per month from the $226 deductible for 2023. The increase in Medicare costs essentially means that most retirees will only see a modest net increase in their overall Social Security benefits next year, with the gain in benefit payments partially offset by the increase in Medicare premiums and higher deductible.
Note that the new benefits will not be reflected in the monthly payouts until January of 2024. That means that for a few more months, which includes Christmas season, retirees will need to endure the higher costs of living without the increase in income. From a financial planning perspective, this may be a good time to keep a larger cash cushion available. It is also important to remember that while this may seem like a pay raise, this does not generally increase the true purchasing value of your social security income.
COLA adjustments alone may not be enough for retirees. Inflation has caused Social Security payments to lose 36% of their buying power since 2000, according to a study released earlier this year by The Senior Citizens League. This comes as many retirees are becoming increasingly concerned about their personal financial situation, and their ability to make their retirement assets last their entire lifetime, and serves to place greater emphasis on the importance of early retirement planning. That should include having a solid retirement plan in place, as well being proactive and deliberate in saving adequately during your working years. It won’t happen by accident!
While the government may try to protect your social security income from inflation, note that you can take control of protecting your own investments. Investing in commodities has traditionally been a good way to participate in rising prices on everything from natural gas, lumber, beef, or orange juice. Precious metals such as gold have historically performed well as a hedge against inflation, certainly as part of a diversified portfolio. Lately, with the inversion in the yield curve, short-term Treasuries (T-Bills) have provided extremely good returns without the risk of high duration bonds. Before long, when rates start to abate, bonds with longer maturities should provide a good opportunity for high current interest income with the potential for gains in the bond prices over time. Remember, too, that equities in general will provide a good, long-term hedge against inflation. This is where professional management can provide considerable value.
When it comes to retirement income planning, Social Security is an important stream of income for millions of Americans. Just remember, the additional income you may be receiving does not necessarily mean you will have excess cash to spend on other things, due to inflation robbing us of purchasing power, so be sure to plan accordingly.
As always, it is important to consult a tax or investment professional before making these important decisions.