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Retirees receiving Social Security are getting a cost-of-living adjustment (COLA) in 2024. This means more money will be coming in their checks each month. Specifically, retirees will get a 3.2% bump in their retirement benefits.

This COLA is often referred to as a raise, but it’s not that simple. Here’s why.

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A cost-of-living adjustment and a raise aren’t the same thing

Inflation drives the price of goods and services higher over time, which is why Congress passed legislation in 1972 to give Social Security benefits an annual COLA.

Each year, the Consumer Price Index for Wage Earners and Clerical Workers (CPI-W) is used to measure how much prices have gone up. If the third-quarter CPI-W reading registers a positive year-over-year change, then benefits will increase by that percentage difference the following year.

In other words, the COLA is intended to help Social Security payouts keep pace with inflation, not raise the buying power of your benefits from year to year.

The CPI-W may not be the best way to measure inflation

There’s another big problem with calling the COLA a raise: In many years, retirees actually see their buying power decline despite the fact their benefits increase on paper.

You may have noticed the consumer price index used in COLA calculations is for “wage earners and clerical workers,” but retirees are typically neither wage earners nor clerical workers. They have different spending patterns than those individuals. As a result, the CPI-W often underestimates how much inflation actually impacts seniors.

The Senior Citizens League estimates Social Security benefits have effectively lost 40% of their buying power since 2000 as a result of the COLA not working as it should — another reminder the COLA isn’t much of a “raise” at all.

Medicare premiums will take a bite out of the COLA too

Finally, there’s one last important issue. Retirees aren’t even going to keep the full amount of their COLA because Medicare costs are increasing. The standard monthly premium for those enrolled in Part B is going to be $9.80 more than the standard premium in 2023. And the annual Medicare deductible for Part B beneficiaries is increasing $14 compared to the 2023 deductible.

Since Medicare Part B premiums are usually withdrawn from Social Security checks, the COLA seniors get is going to be reduced by $9.80. And those who use healthcare services will have to pay more out of pocket for them before their Medicare coverage kicks in. Increases in healthcare spending are one big cause for rising Medicare premiums, and healthcare expenditures often tend to increase faster than inflation in other areas of the economy.

For all of these reasons, it’s important retirees stick to their budgets, make sure they’re using Social Security benefits wisely, and maintain a safe withdrawal rate from their savings so their money lasts as long as they need it to.

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