By Anne Tergesen
Sept. 11, 2024
Social Security recipients are on track for a smaller cost-of-living adjustment next year.
The cost-of-living adjustment, or COLA, that retirees receive each year is tied to the average inflation data for July, August and September, so the actual increase won’t be clear until October. There was a 2.9% increase in July, the Labor Department reported Wednesday that the August figure rose at an annual rate of 2.5%, although the inflation index the COLA is based on rose 2.4%.
Hyungwon Kang/REUTERS
As of now, the Senior Citizens League, which advocates to protect Social Security and Medicare, is forecasting a 2.5% COLA in 2025 for the nation’s 68 million Social Security recipients. The Committee for a Responsible Federal Budget, a nonpartisan think tank focused on the federal budget, projects it at around 2.5%.
A 2.5% increase would raise average retirement benefits by about $48 to $1,966, starting in January. That would mark a return to something closer to normal after a three-year run in which the COLA boosted benefits a cumulative 18.8% to keep up with inflation’s biggest surge in decades.
For the better part of three years, retirees have had to pay more for everything from groceries to insurance. It has been harder to stick to a budget, and many had to draw down their savings faster than they expected.
A smaller COLA means inflation is cooling. That helps preserve the value of the cash and bonds many retirees stockpile for near-term expenses and makes it easier to plan for the future.
But it doesn’t mean prices are coming down.
Back to work
Art Barton, 73 years old, retired from a sales job at a wireless technology company in late 2021. He returned to similar work in 2022 as inflation soared.
The resident of Tiburon, Calif., just north of San Francisco, figures his cost of living rose about 30% since 2019. He said he is paying contractors as much as 45% more for home repairs, including recently replacing the roof and eliminating dry rot in the wood shingles. His home insurance premiums rose 40%. Both groceries and the chiropractor now cost 30% more.
Social Security is his largest source of retirement income, he said, and the COLA helped somewhat. But he has pensions that aren’t adjusted for inflation.
Without a paycheck, he said he and his wife would have had to withdraw more than planned from their savings in 2022, a year when both the stock and bond markets declined. “It was extremely helpful to go back to work,” said Barton, who retired again last year but is considering short-term projects for both income and stimulation.
Inflation risk
The degree to which retirees’ incomes have kept up with inflation depends largely on where their money is invested and the type of retirement benefits they have.
Stocks have risen enough to keep up with inflation: From February 2020 to July 2024, U.S. stocks returned an annualized 9.6%, adjusted for inflation, according to Morningstar. Bonds and pensions generally haven’t.
According to Lowell Ricketts, a data scientist at the Federal Reserve Bank of St. Louis, inflation-adjusted income for retirees with median incomes rose 4.4% from 2019 to 2022. For a higher-earning retiree in the 75th percentile, income rose 6.6% versus a decline of 1.2% for those in the 25th percentile of income.
Middle- and lower-income households tend to have a higher percentage of their savings in bonds and cash than in stocks, said Laura Quinby, a senior research economist at Boston College’s Center for Retirement Research, based on an analysis of Federal Reserve data.
U.S. bonds lost an annualized 4.98% from February 2020 to July 2024, adjusted for inflation, while cash lost 2.2%, Morningstar said.
On average, middle-income retirees depend more on pensions as a percentage of income than higher-income households do. Pensions sponsored by private-sector employers don’t generally adjust for inflation. While many public-sector pensions boost payouts, they often cap the increase at about 3%, Quinby said.
Susan Gering said she and her husband, John, both 74, have cut spending so they could stick to their planned retirement savings withdrawals since 2022, when inflation peaked at 9.1%.
“We felt really good about our budget until 2022,” said the former teacher and administrator, who retired in 2019, two years before her husband.
The Brentwood, Tenn., couple’s travel budget now covers about half the annual trips they had hoped to take. To cut costs, they recently went to Florida rather than Hawaii. The Atlanta Braves fans also reduced their visits to the ballpark, which now cost about $1,000 each, due to travel and hotel costs, to a couple per year.
They plan to drive their cars several years longer and have cut back on restaurant meals.
Medicare and COLA
Some of the Social Security COLA is offset by rising premiums for Medicare Part B, which covers doctor visits and outpatient care. For many Social Security recipients, the Part B premium is automatically deducted from Social Security checks.
Next year, the standard Part B premium is slated to rise to $185 a month from $174.70, according to estimates Medicare’s trustees released in May. That would consume about 20% of the average $48 projected COLA raise.
Write to Anne Tergesen at anne.tergesen@wsj.com
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