The 2024 Social Security benefit COLA was 3.2%. Here’s how it compares to the 10-year average COLA:

Social Security benefits are protected against inflation through annual cost-of-living adjustments (COLAs). But some retired workers feel shortchanged by the 3.2% COLA for 2024. This figure pales in comparison to the 8.7% increase in 2023 and the 5.9% COLA in 2022, with the rampant inflation of the past few years still fresh in our minds. Among many Americans.

But some perspective may help retired workers feel better about recent benefit increases. Check out the average Social Security COLA over the past 10 years and find out why a larger COLA in 2024 could be a bad thing.

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Average Social Security Cost-of-Living Adjustment (COLA) over the past 10 years

Since 1975, Social Security benefits have received an annual cost-of-living adjustment (COLA) to offset the effects of inflation. These COLAs are based on changes in the Consumer Price Index for Urban Wage and White Collar Workers (CPI-W), a measure of monthly price changes based on workers’ spending patterns.

To elaborate, divide the CPI-W for the third quarter of this year (i.e. July through September) by the CPI-W of the third quarter of the previous year. The increase (if any) becomes the COLA for the following year. For example, CPI-W in the third quarter increased 3.2% in 2023, which is why Social Security benefits gained a 3.2% COLA in 2024.

The table below shows Social Security COLAs over the past 10 years. At the bottom we also include the 10-year average COLA.

Data source: Social Security Administration. Shown above are the Social Security cost-of-living adjustments (COLAs) for each year for the past 10 years. The 10-year average was rounded up from 2.75% to 2.8%.

As you can see above, the average Social Security COLA over the past 10 years has been 2.8%. This means that the 2024 COLA of 3.2% is well above the 10-year average. Also, although not shown in the table above, the average Social Security COLA over the past 20 years has been 2.6%, so the 2024 COLA looks better compared to the 20-year average.

If there had been a larger Social Security COLA, benefit cuts might have been closer.

A recent survey by Natixis found that inflation is the most common financial fear among working and retired workers. This tells us that Americans will not soon forget the hardships caused by rapid price increases over the past few years. But a smaller COLA means inflation is slowing, which means Social Security benefits will maintain their purchasing power at a better level this year. That’s a positive development. But there is another angle to the situation that beneficiaries should consider.

The Social Security program is quickly running out of money. In fact, the Old-Age, Survivors, and Disability Insurance (OASDI) Trust Fund, the source of benefits paid to retired workers and other beneficiaries, is on pace to be depleted by 2034, according to the board. But that schedule was premised on certain assumptions, including that the 2024 COLA would not exceed 3.3%. Any more than that could accelerate the time it takes to trust funds to run out.

So what? The Trustees estimate that 80% of benefits will be paid out once the OASDI Trust Fund is actually depleted in 2034. At that point, benefit cuts of at least 20 percent will occur automatically, unless Congress finds a solution in advance. A higher COLA in 2024 could bring benefit cuts closer and give Washington lawmakers less time to address the issue. In fact, the 8.7% COLA for 2023 is actually a year ahead of schedule. Prior to the large benefit increase, the OASDI Trust Fund was on pace to be depleted by 2035 (not 2034).

Of course, the silver linings I mentioned won’t put more money in the pockets of Social Security recipients, and the 2024 COLA is undoubtedly disappointing compared to the benefit increases over the past two years. However, inflation has fallen sharply from its peak of 9.8% in June 2022 (as measured by the 12-month change in discipline in the CPI-W). In fact, the December 2023 figure was 3.3%. Social Security recipients tend to be conservative when it comes to making financial decisions, but there’s good reason to believe that price increases will be much less severe in 2024 than in past years.