Because any possible cost-of-living adjustment must be factored into benefits at the start of the new year, beneficiaries will receive increases after already experiencing higher prices. The COLA is calculated using the Consumer Price Index for Urban Wage Earners and Office Workers (CPI-W): Social Security takes the average inflation reading from July, August, and September of the current year and compares that to the same period a year prior. Every increase results in a salary increase.
There has long been a debate about whether the CPI-W index is the most accurate measure for calculating Social Security adjustments because it reflects a basket of goods and services purchased by working people rather than retirees. Retirees tend to spend a larger portion of their income on housing and health care, which may be better reflected by another experimental measure, the Consumer Price Index for the Elderly (CPI-E.), which tracks people ages 62 and older.
“If this were the law today, the COLA would be higher in 2024,” said Ms. Johnson of the Senior Citizens League. She said the COLA adjustment will be about a percentage point higher than the increase announced Thursday. However, the CPI-E does not always provide a higher inflation adjustment, and the differences between the two indices have narrowed in recent years.
And some experts say tinkering with the inflation mechanism has become less important given the looming Social Security funding shortfall that, if left unaddressed, would lead to significant benefit cuts across the board. The trust fund that pays retirement benefits, funded primarily by payroll taxes, will be depleted in 2033. At this point, the program could only fund 77 percent of the total planned services.
The payroll tax is split between employers and employees, who each paid 6.2 percent of wages in 2023, up to a maximum taxable income of $160,200. Next year, up to $168,600 in income will be subject to this tax. The only way to close the funding gap is to raise these taxes — or make them cover more income — or cut welfare benefits, all of which require congressional approval.
“The Social Security Administration is publishing this book that lays out hundreds of ways to increase earnings and hundreds of ways to reduce benefits,” said Alicia Munnell, director of the Center for Retirement Research at Boston College. “It’s not an intellectual exercise. It is a political exercise. And I don’t think Congress wants a 23 percent cut in benefits percent across the board.”