What the 2024 Social Security COLA Could Mean for Your Retirement

Social Security benefits for millions of people will rise by an average of over $50 a month starting in January, thanks to the Social Security Administration's 3.2% annual cost of living adjustment for 2024, announced on Oct. 12. The change will immediately put more money in current retirees' pockets, but it also could have a considerable effect on payouts to future retirees.

The 2024 increase is much smaller than last year’s 8.7%, the largest since 1981. But because the COLA reflects inflation, a smaller increase is not necessarily a bad thing; it suggests that inflation is more stable and may help the Social Security Administration provide maximum benefits for longer.

The COLA has been relatively volatile in recent years, however, and future retirees are understandably concerned about the health of the Social Security benefits program.

Here’s what the cost of living adjustments really mean and how to factor Social Security benefits into your future retirement budget.

Though it’s reasonable to assume that a lower cost of living adjustment is worse for Social Security recipients, it may also point to a healthier economy. The SSA increases the COLA in response to inflation, which means that a hefty COLA jump — like last year’s 8.7% — reflects a serious bump in the costs of goods and services.

“The [Federal Reserve’s] goal is for inflation to be 2% or lower, and therefore, the COLA increases by Social Security would be 2% or lower,” says Randall Holcombe, a certified financial planner and director of wealth planning at Confluence Financial Partners in Pittsburgh. “If your costs aren’t going up so much, then your Social Security isn’t going up as much, but then again, you don’t need Social Security to go up as much,” he says.

Many financial planners incorporate a flat annual COLA into their clients' retirement plans. “I typically build in an inflation rate of around 3%,” says Elaine Floyd, a certified financial planner and director of retirement and life planning at New York-based financial advisory firm Horsesmouth LLC.

“We want to be conservative when we’re projecting Social Security income,” Floyd says. Even this year’s increase may not be the most accurate predictor of what your benefits might look like decades in the future.

The COLA isn’t the only annual change to Social Security benefit amounts. Yearly changes to the lesser-known national average wage index can also significantly impact current and future retirees. The SSA applies the index to your 35 highest-earning years in the workforce as part of its benefits calculation.

“Wages tend to rise faster than prices,” Floyd says. The most recent increase in the average wage index is 5.32%, more than the 3.2% COLA.

“I really want younger people to understand the connection between their own earnings and their eventual Social Security benefits,” Floyd adds. She suggests thinking about that connection throughout your career, especially when making decisions about sabbaticals or job choices.

“Your eventual benefits will reflect the rise in wages over your career,” she says. “Ask for those raises.”

Many workers set to retire after 2034, when the SSA currently expects to deplete the reserves it holds in the Social Security trust fund, are concerned about whether they can count on Social Security benefits. Social Security benefits now make up, on average, 30% of retiree income, according to the SSA, a significant chunk.

But Holcombe says he reminds wary clients that most of the Social Security program is funded directly from current employee and employer taxes.

Because of declining birth rates, the gap between the number of workers paying Social Security taxes and the number of retirees receiving benefits is larger now. “The trust fund exists to make up the shortfall,” Holcombe says, explaining that the fund works as a buffer to ensure retirees receive full benefits despite declining taxpayer funding.

There are ways to prepare for volatility or major changes, especially if you have a while to go before retirement. Individual retirement accounts and a well-rounded investment portfolio can balance out some of that uncertainty over the course of decades.

“A little bit over a long time goes a long way with the stock market,” Holcombe says. “It’s a lot easier to make those adjustments in your 20s and 30s than it is when you’re 50 to 60 and thinking about retirement.”

Holcombe adds that any changes the SSA makes to the program are more likely to affect future retirees, who have more time now to plan accordingly.

“It is not prudent to assume there won’t be any changes by the time [millennials] retire,” Holcombe says. “But it’s also not prudent to discount Social Security entirely.”