As inflation cools down, the odds are heating up that Social Security benefits won’t rise as dramatically next year as they did in 2023.
Retirees likely could be looking at a cost of living adjustment somewhere in the 3% range — less than half of the COLA increase they saw in 2023, according to forecasts by the Senior Citizens League, a nonpartisan advocacy group. The group monitors inflation data to offer forecasts of potential COLA changes ahead.
Another estimate is expected to be released on Sept. 13 and could be higher or lower, depending on new inflation data for August. An exact percentage for the inflation adjustment will be known in mid-October.
This year’s COLA amounted to an 8.7% bump for Social Security benefits, as well as Supplemental Security Income benefits — the biggest increase since 1981 when the inflation adjustment was 11.2%.
The cost-of-living adjustment that was payable in 2022 was solid at 5.9%, too.
No one should bank just yet on how much of an increase they might see in their Social Security benefits next year. Yet, some observers expect that an increase in the range of 2.7% to 3.2% remains a strong possibility.
“We are returning to reality,” said Mary Johnson, a policy analyst at the Senior Citizens League who oversees estimates regarding inflation adjustments for Social Security.
“However,” she said, “the 3% is still above average.”
In the last two decades, Johnson noted, the average inflation adjustment for Social Security benefits was 2.6%. Three years included no adjustment at all or 0% for inflation — 2010, 2011, and 2016.
The inflation adjustments were modest before the COVID-19 pandemic hit, the supply chains unraveled and federal stimulus payments flooded cash into the economy. During 2020, the inflation adjustment for Social Security benefits was 1.6%. It was followed by a 1.3% hike to payments in 2021.
Even so, Johnson noted, when you compare an estimated 3% against last year’s 8.7% hike, for many seniors on tight budgets it “will feel like drowning.”
How inflation drives up Social Security checks
A specific formula, spelled out in the Social Security Act, will be used to calculate the upcoming inflation adjustment based on monthly changes for July, August and September for the Consumer Price Index for Urban Wage Earners and Clerical Workers.
The U.S. Bureau of Labor Statistics will release inflation data for August at 8:30 a.m. Sept. 13. The September data will be released Oct. 12.
The most recently released data showed an increase of 3.2% in the consumer price index in July over the past year.
The Consumer Price Index for Urban Wage Earners and Clerical Workers or CPI-W increased by 2.6% over the last 12 months through July.
To calculate Social Security adjustments, inflation figures based on the CPI-W for July, August and September are added together and averaged.
As inflation continues, this year’s third-quarter average will be compared with the third-quarter average from one year ago. The percentage difference between the two is the amount of the COLA, which would be payable for the check received in January 2024, according to an explanation by the Senior Citizens League.
If the COLA ends up at 3%, as the advocacy group now expects, the average monthly Social Security retirement benefit would increase by roughly $55 a month. The average monthly benefit for all retired workers was $1,827 in January after the COLA adjustment this year, according to the Social Security Administration. Add up the extra $55 over 12 months and some could be looking at an extra $660 a year.
In 2023, the COLA adjustment added up to an extra $146 a month based on an average benefit of around $1,681 a month for all retired workers. On a yearly basis, that kind of COLA adjustment added up to an extra $1,752 over 12 months.
About 71 million people nationwide received Social Security benefits and/or Supplemental Security Income benefits as of June, according to Social Security data.
What is the outlook for inflation?
Some economists don’t expect inflation to drop in a straight line going forward. But the expectation is that inflation overall is likely to continue to fade after 11 interest rate hikes by the Federal Reserve since March 2022.
Inflation might bump up some and rebound if we see rapid wage growth that would contribute to higher prices for some goods down the line.
The year-over-year consumer price index might go up about 3.6% to 3.7% in August and rise around 3.5% to 3.6% in September, according to a forecast by Omair Sharif, founder and president of Inflation Insights in Pasadena, California. That would be up from July’s year-over-year 3.2%.
“It will likely drop back in October and November,” Sharif said.
Comerica Bank’s chief economist is forecasting that the Federal Reserve will pause and not raise interest rates at its next two-day meeting on Sept. 19 and Sept. 20. But Comerica then expects the Fed to raise the short-term federal funds rate target by a quarter percentage point after another two-day meeting ends Nov. 1.
After a November rate hike, according to the Comerica forecast, the Fed could shift gears and begin cutting interest rates during the first six months of 2024.
Bill Adams, chief economist for Comerica Bank, said Comerica is forecasting that the consumer price index is likely to be around 3.3% in year-over-year terms in September. If so, Adams said, that would correspond to CPI-W of around 3%.
Why some retirees need to prepare for bigger tax bills
Retirees who are collecting Social Security — and receiving a pension or tapping into 401(k) savings — are likely to grumble more when it comes to their 2023 tax returns.
The taxes are complicated when it comes to Social Security benefits but unfortunately, many retirees need to review them.
If you file as an individual, you may have to pay income tax on up to 50% of your Social Security benefits if the calculation for what’s called your combined income ends up between $25,000 and $34,000.
Your combined income is your adjusted gross income, plus non-taxable interest, plus half of your Social Security benefits.
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If you file a joint return, you may have to pay income tax on up to 50% of your Social Security benefits if your combined income: is between $32,000 and $44,000.
In some cases, the IRS guidelines note, up to 85% of your Social Security benefits can be taxable if either of situation applies:
• The total of one-half of your benefits and all your other income is more than $34,000 if filing as an individual or $44,000 if you are married, filing jointly.• You are married, filing separately, and lived with your spouse at any time during the calendar year.
Taxpayers can review IRS Publication 915 for information on Social Security benefits and federal income taxes.
April Walker, lead manager for tax practice and ethics with the American Institute of CPAs, said the inflation-driven boost to Social Security benefits paid in 2023 would certainly increase the amount of the total combined income, all other things being equal, used to calculate any taxes on Social Security benefits when people file federal income tax returns in 2024.
“Since the (tax) thresholds are not adjusted for inflation,” Walker said, “more seniors could have to pay taxes on a percentage of their Social Security.”
Up to 50% of Social Security benefits first became taxable in 1984. The second tier, where up to 85% of Social Security benefits could be taxable, became effective in 1993. At that time, the tax was described as only affecting “high-income” seniors, Johnson said.
Unlike income tax brackets, Johnson notes, those income thresholds relating to taxing Social Security benefits were never adjusted for inflation. As a result, she said, over time a growing number of older taxpayers are winding up paying taxes on Social Security benefits as incomes grow and they pay tax on a larger portion of their Social Security benefits.
Today, Johnson said, even retirees with modest middle incomes pay a tax on a portion of their benefits, which can grow bigger with COLA increases.
Yet, Johnson noted, that changing how Social Security benefits are taxed can be lead to a complex debate because the revenue from the taxes create an important source of funding for the Social Security and Medicare trust funds.
Why you won’t necessarily see an extra $55 a month
To be sure, someone who is receiving $1,000 a month in Social Security retirement benefits now — say if they retired before their full retirement age or did not work many years — would only see a $30 increase based on a 3% hike.
And, again, we don’t know the exact COLA calculation just yet so the hike could be lower than 3%.
And key to many Social Security recipients: Those who are on Medicare will not know the bottom line of a COLA boost until new Medicare Part B premiums are announced later in 2023. That extra premium cost will take a chunk of money out of any COLA hike.
The Medicare trustees projected in March that the standard monthly Part B premium could go up $10 a month to $174.80 in 2024 for the standard monthly premium. A final number could be released in November or earlier.
Johnson expects that another $5 could be added to premiums to cover significant new administrative and monitoring costs associated with a new Alzheimer’s drug, lecanemab, which comes with an extremely steep price tag and is known by the brand name Leqembi. The drug is expected to cost around $26,000 per year without insurance.
Contact personal finance columnist Susan Tompor: [email protected]. Follow her on Twitter @tompor.
This article originally appeared on Detroit Free Press: Social Security COLA benefits increase for 2024: What predictions say
Source: https://finance.yahoo.com/news/social-security-cola-increase-return-110124249.html