Social Security: 2024 COLA Predicted to Drop by 5.7% — But It Could Save You on Taxes
Written by
Vance Cariaga
Edited by
Nicholas Morine
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It’s almost a sure bet that the 2024 Social Security cost-of-living adjustment (COLA) will be around 3%, based on the U.S. Department of Labor’s latest inflation data. That’s well down from the 8.7% annual adjustment approved for 2023 — the highest in more than 40 years — but there could be a silver lining in a much lower COLA.
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Overall inflation in July 2023 rose 3.2% from the previous year, according to data released Thursday by the Bureau of Labor Statistics (BLS). That was up slightly from the previous month, but represented a major dip from the 8.5% inflation rate in July 2022.
Inflation has been on a steady decline in recent months, which means Social Security recipients can expect a 2024 COLA decline as well. In an Aug. 10 press release shared with GOBankingRates, The Senior Citizens League (TSCL) indicated the COLA for 2024 is “looking increasingly like it may be around 3%” based on consumer price index data.
“Overall, the rate of inflation in July is significantly lower than a year ago, but most older Americans are reporting that persistently high prices still affect their household budgets according to results from a new survey,” Mary Johnson, TSCL’s Social Security and Medicare policy analyst, stated in the press release.
The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) — the index used to determine the yearly COLA — rose 2.6% year over year in July. But because the overall inflation rate is slightly higher, TSCL is keeping is COLA estimate at 3%.
As The Senior Citizens League noted, July CPI data is important because the COLA is calculated based on inflation during the third quarter — July, August, and September – as measured by the CPI-W. Inflation for those three months is added together and averaged, then compared with the Q3 average from a year earlier. The percentage difference between the two is the amount of the COLA, which would be payable for checks received in January 2024.
The Senior Citizens League will issue its final 2024 COLA estimate on Sept. 13, 2023. The official COLA announcement is expected to be Oct. 12.
Silver Lining to a Lower COLA Increase
Although a COLA decrease of 5.7% from one year to the next might look like bad news — especially for seniors who must deal with food and healthcare prices that are rising faster than overall inflation — there is at least one potential advantage: lower taxes.
TSCL’s latest consumer survey found that nearly one-quarter of Social Security beneficiaries (23%) said they paid tax on a portion of their benefits for the first time this past tax season, the 401k Specialist website reported.
“We expect the number who pay tax on a portion of their Social Security benefits to jump even more as next year’s tax season reflects the 8.7% COLA increase in 2023,” Johnson told 401k Specialist.
Social Security payments are taxable for those who surpass certain income thresholds. This year’s high 8.7% COLA pushed some Social Security recipients into a higher tax bracket, which means many faced higher taxes as well.
As previously reported by GOBankingRates, Social Security recipients might owe taxes on a portion of their Social Security benefits when their “combined income” is greater than $25,000 for single filers or $32,000 for couples filing jointly.
Combined income, also known as provisional income, is the total of half of your Social Security benefits, your tax-exempt interest and other non-Social Security items (such as jobs or investments) that make up your adjusted gross income.
The good news is, a much lower COLA in 2024 could lead to lower taxes for some Social Security recipients. According to 401k Specialist, depending on how far a beneficiary is over the base amount, either 50% or 85% of benefits are currently taxable. For those under the base amount, Social Security benefits are not taxable. Individuals with combined income of more than $34,000, as well as couples with more than $44,000, could pay tax on up to 85% of their benefits.
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