For most retirees, Social Security income is indispensable. More than two decades of surveys from national pollster Gallup have shown that an overwhelming percentage of current and future retirees are reliant on, or expect to lean on, their Social Security income to cover at least some portion of their expenses.

Considering how important Social Security benefits are to the financial well-being of our nation’s aging workforce, it’s no surprise that the annually announced cost-of-living adjustment (COLA) is the most anticipated event of the year for America’s top retirement program. Unfortunately, there’s no silver lining waiting for Social Security’s beneficiaries in 2024.

What, exactly, is Social Security’s COLA, and how is it calculated?

COLA is the mechanism that adjusts Social Security benefits most years for inflation (the rising price of goods and services). If the goods and services seniors regularly buy collectively increase in price, benefits paid to retired workers should, ideally, rise by the same percentage to ensure no loss of purchasing power. COLA is the tool that makes that happen.

For more than three decades after the first retired-worker benefit was paid in January 1940, Social Security’s cost-of-living adjustments were completely arbitrary and passed along by special sessions of Congress. But since 1975, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) has served as the program’s inflationary measure.

The CPI-W has more than half a dozen major spending categories, along with dozens upon dozens of subcategories, all of which have their own respective weightings. These weightings are what allow the CPI-W to be chiseled down to a single figure each month, which makes for easy month-over-month and year-over-year comparisons to see which direction prices are headed.

Only the CPI-W readings from the third quarter (July-September) are used to calculate Social Security’s COLA. If the average CPI-W reading from Q3 of the current year is higher than the average CPI-W reading from Q3 of the previous year, inflation has occurred and beneficiaries are due a higher payout in the coming year.

The year-over-year percentage difference in average Q3 CPI-W readings, rounded to the nearest tenth of a percent, determines how much Social Security benefits will increase in the following year.

An above-average cost-of-living adjustment awaits Social Security beneficiaries in 2024

On a nominal-dollar basis, Social Security’s nearly 67 million beneficiaries have reason to smile.

Following the release of the September inflation report by the U.S. Bureau of Labor Statistics on Oct. 12, the Social Security Administration announced a 3.2% cost-of-living adjustment for 2024. Although this is well below the 8.7% COLA program beneficiaries enjoyed this year, it’s still modestly above the 2.6% average COLA passed along over the past two decades.

For the close to 50 million retired workers who are receiving a monthly Social Security check, a 3.2% COLA translates into an estimated $59-per-month boost next year to an average $1,907 per month.

But let’s not forget that Social Security provides a financial foundation for more than just retired workers. Approximately 7.4 million workers qualified for long-term disability benefits in October. Meanwhile, around 5.8 million people are currently receiving a monthly survivor benefit based on the earnings history of a deceased worker.

Social Security’s 2024 COLA will lift the average monthly benefit for workers with disabilities and survivor beneficiaries by $48 and $47, respectively, leading to average payouts of $1,537 and $1,505 per month next year.

Persistently high core inflation, which has been buoyed by rising rent and housing costs, is what’s primarily responsible for increasing Social Security checks by 3.2% next year.

There’ll be no silver lining for Social Security beneficiaries next year

On paper, an above-average COLA probably sounds great. But dig a bit deeper, and you’ll see that a potential triple whammy awaits retirees in 2024.

To start with, Social Security’s cost-of-living adjustment has been shortchanging retirees for more than two decades. That’s because the CPI-W tracks the spending habits of “urban wage earners and clerical workers.” Whereas 86% of Social Security beneficiaries are aged 62 and above, most urban wage earners and clerical workers are working-age Americans who aren’t currently receiving a Social Security check.

According to a May 2023 analysis from The Senior Citizens League, a nonpartisan senior advocacy group, aggregate COLAs between January 2000 and February 2023 increased benefits by roughly 78%. In comparison, the cost a comprehensive basket of dozens of goods and services typically purchased by retirees rose by 141.4% over the same timeline. Put another way, the purchasing power of a Social Security dollar has fallen by 36% since this century began. A 3.2% COLA in 2024 isn’t going to make a dent in this persistent loss of purchasing power.

There’s also no silver lining for retired workers with traditional Medicare coverage in 2024.

In 2023, Medicare Part B premiums – this is the segment of Medicare that covers outpatient services – declined by approximately 3% (from $170.10/month to $164.90/month). This marked only the second time this century that Part B premiums fell from one year to the next. Since Part B premiums are often deducted from a worker’s monthly benefit, and this year’s COLA was a historic 8.7%, most retirees were able to “get ahead” and outpace the prevailing inflation rate. In other words, they kept more of their benefit increase.

This won’t be the case next year. The approval of new Alzheimer’s drug Leqembi, which can cost $26,500 annually for the uninsured, is the driving force behind a nearly 6% increase in Part B premiums to $174.70/month. A sizable jump in Part B premiums will offset some or all of next year’s COLA for most retirees.

The third whammy awaiting retirees in 2024 is a higher likelihood of being subjected to the federal taxation of Social Security benefits.

The Social Security Amendments of 1983 introduced the taxation of benefits as a way to generate additional revenue. If a beneficiary’s provisional income tops $25,000 (or $32,000 for a couple filing jointly), up to half of their benefits can be subjected to federal income tax rates.

In 1993, the Clinton administration added a second tax tier that made up to 85% of Social Security benefits taxable for single filers and couples whose provisional income topped $34,000 and $44,000, respectively. None of these income thresholds have been adjusted for inflation since they were introduced decades ago.

Even though Social Security’s annual COLAs haven’t kept pace with the actual inflation retirees have faced, the likelihood of retirees being taxed on their benefits rises with each passing year.