In 2024, the annual increase to Social Security benefits (COLA) will be 3.2%.
This adjustment will affect Social Security retirement, disability, and SSI payments. The updated amounts will take effect in December, with recipients seeing the increase in their January payments. Note: Due to January 1 being a holiday and the normal SSI payment date being the first of the month, SSI payments for January are always disbursed at the end of the previous December.
With this update to Social Security benefits for 2024, many recipients understandably have questions about what this means for them. From how the increase was determined to how it will be applied, to who actually will see a benefit increase, it’s essential to have clarity on these changes. Let’s dive into the most frequently asked questions about this year’s COLA and provide you with the answers you need.
How is the COLA calculated?
The Social Security Administration (SSA) annually calculates the Cost of Living Adjustment (COLA) based on inflation. To understand this process, it’s important to note that the SSA uses the CPI-W (Consumer Price Index for Urban Wage Earners and Clerical Workers) as the primary measure for inflation, which is supplied by the Bureau of Labor Statistics. Although the Bureau releases this data every month, the SSA only uses the numbers from the third quarter, encompassing July, August, and September. The data from this quarter in the current year is then compared to the same period in the previous year. Based on this comparison, if the current year’s CPI-W is higher, there’s an increase in Social Security benefits. However, if the CPI-W remains the same or drops, then there is no Cost of Living Adjustment for that year.
How is the COLA applied to a benefit?
The way the Cost of Living Adjustment (COLA) is applied to Social Security might seem straightforward, but the actual method can give results that are slightly different from initial expectations. Instead of just increasing all the estimated benefit amounts for different ages by the announced COLA percentage, the adjustment is made to your primary insurance amount (PIA). The PIA is basically what you’d receive if you retire at the full retirement age. The adjustment starts with your PIA, and then factors in any increases if you decide to retire later or reductions if you opt for early retirement.Here’s how it works: Your PIA is first updated with the COLA. Then, depending on whether you retire early or late, reductions or increases are made. Once calculated, the amount is rounded down to the nearest dime. Lastly, any applicable deductions like Medicare Part B premiums are subtracted. This final number, once again rounded down to the nearest dollar, becomes your final benefit amount.
What age does the COLA start applying?
The Social Security publication titled “Your Retirement Benefit: How It’s Figured” succinctly addresses when the COLAs start applying to benefits. They say: “You’re eligible for cost-of-living benefit increases starting with the year you turn age 62.” That seems clear, but the COLAs are commonly reported in such a way that makes it difficult to understand. For example, in October of 2021 the SSA announced a 5.9% COLA. In most publications and new reports, this was referred to as the “2022” COLA. There are places where even the Social Security Administration seems to refer to this as the 2022 COLA. This led many to think that if they turned 62 in 2022, the cost of living would apply to their benefit. That’s not accurate. Technically, the COLA announced in October of 2021 was the 2021 COLA. It was announced in 2021, and applied to benefits in December of 2021 (payable in January of the following year).
If you look closely, there are multiple places where the SSA referred to this as the 2021 COLA while the rest of the world called it the 2022 COLA.
Here’s the easiest way to remember this: The first COLA which will become effective is the one announced in the same year you turn age 62.
Do you have to be receiving benefits to get the COLA increase?
Whether you have filed for benefits or not, the Social Security COLA applies to your benefits starting with the one announced in the year you turn 62.
The Social Security Administration has a piece that is very clear on this. It says, “You’re eligible for cost-of-living benefit increases starting with the year you become age 62. This is true even if you don’t get benefits until your full retirement age or even age 70. We add cost-of-living increases to your benefit beginning with the year you reach 62.”
Now that’s very clear as to when it applies to retirement benefits, but it doesn’t mention survivor or disability. For that, we have to dig a little deeper into the Social Security website.
Because these rules are often a bit convoluted, we actually have to reference two different rules. First, we find the rule on when the COLA is applied and according to their program operations manual systems, or POMS, (that’s the handbook for processing claims), they say “Beneficiaries entitled to an AIME PIA or a Transitional Guarantee PIA are entitled to any COLA which occurs in or after the benchmark year.”
Here’s the simplified interpretation of that.
If you become entitled to benefits after 1978, you are entitled to any COLA which occurs in or after your benchmark year.
This raises the obvious question…what is a benchmark year? For that, we turn to another section of this manual which defines the benchmark year for retirement, disability, and survivor benefits.
- For retirement benefits, the benchmark year is the year you turn 62.
- For survivor benefits, it’s the earliest of the year you turn 62 or the year of death.
- For disability benefits, it’s the earliest of the year you turn 62 or the year you become disabled.
Note: There are some changes that could happen to the benchmark year for disability benefits if you are on receiving disability and then stop for at least a 12 month period before filing for retirement benefits. For the full rules on this, read section B of the POMS manual page.
Staying informed about the annual changes to Social Security benefits is crucial for those depending on these payments. Beyond the COLA adjustment, there are also significant updates to the earnings limit, the benefits formula, and much more that can impact your monthly checks. To navigate these shifts, a reliable and concise resource is invaluable. This is where our Social Security Cheat Sheet comes in. We’ve distilled the extensive information from the official 100,000-page Social Security website into a manageable, two-page guide. By downloading this resource, you’ll have all the important insights at your fingertips. Plus, by staying subscribed to our email list, you’ll automatically receive the updated cheat sheet every year as soon as new data is released. Equip yourself with knowledge and clarity; click here to download our Social Security Cheat Sheet today.