WSJ Your Money Briefing - Social Security Recipients on Track for a Smaller Raise Next Year

Episode Date: September 16, 2024

The annual cost of living adjustment for Social Security monthly payments is projected to rise at a significantly smaller pace than the past several years. Wall S treet Journal reporter Anne Tergesen joins host J.R. Whalen to discuss how the increase is designed to prevent retirees from losing ground to inflation. Sign up for the WSJ's free Markets A.M. newsletter. Learn more about your ad choices. Visit megaphone.fm/adchoices

Ecolab Water for Climate. Less water, more growth. Results will vary. Learn more at Ecolab.com slash EWC. Ecolab Water for Climate. Transforming the way the world thinks about water. Here's your money briefing for Monday, September 16th. I'm JR Whalen for the Wall Street Journal. This summer's inflation readings have given us a preliminary idea of what the monthly increase for Social Security recipients will be in 2025. It's looking like about two and a half percent for next year, which is significantly lower than we've seen in a while, but yet also reflects the fact that inflation is lower than it's been in a while. But the lower cost of living adjustment isn't necessarily a bad thing for retirees. We'll run the numbers with Wall Street Journal reporter Anne Turgeson after the break.

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Ann how is the Social Security cost of living adjustment, or COLA, calculated? It is calculated based on a consumer price index for urban workers, to be specific. But the one that they look at is the July, August, and September data. And we just had the August data come out. And so we can get a pretty good sense of what that COLA is gonna be. So based on how the consumer price index has trended recently, what kind of an increase can retirees expect? Nonprofits that follow this are saying it's looking like about two and a half percent for next year, which is significantly lower than we've seen in a while, but yet also reflects

the fact that inflation is lower than it's been in a while. Now, I know the two and a half percent is an estimation so far, but based on that, what's the estimated dollar increase people might see per month? I calculated that for the average Social Security check, which is about $1,900, a little more than that currently. And based on a two and a half percent COLA I think the average person would see about a $50 a month increase. When will recipients see that increase

in their checks? Starting in January. The smaller increase is an indication that inflation has cooled off but that doesn't mean prices are coming down, right? Right, so people get really confused by this. I mean in fact if prices were to come down it would be a sign of economic weakness. In fact, an economist I spoke to said, you know, if we get broad based, what they call deflation when prices come down, that often is a sign of an economic recession on the order, maybe of something even worse. So broad based deflation isn't something that we should want to see. So in fact, the inflationary spike we've had since the pandemic is baked in at this point, barring something like some economic calamity that would cause prices to go down. So we're sort of permanently stuck at higher price level in general. Overall, the way to get out of that, the way to make life more affordable, is for wages to go up. So that's where the COLA is important because the objective with the COLA isn't

to give people a raise. You know, when you're in the workforce, you might get raises and some of those raises are intended to keep you on a par with inflation so that you're not losing ground economically. However, of course, sometimes there are merit raises or promotions and those raises can take you to the point where you're getting an improvement in your cost of living. The COLA is not intended as akin to a merit raise. It's intended to keep retirees from losing ground to inflation. What would happen if inflation were to spike in the weeks after the monthly increase for 2025 is officially announced. Could that figure be adjusted to keep pace?

So what happens then is that that will then get baked into next year's calculation because that will raise the price level such that when they go next July, August and September's data will incorporate that higher price level, will reflect it. So in effect, the COLA catches up over time. When inflation is rising, the COLA often lags a little bit, but when inflation is going to a lower rate of increase, which is what we're seeing now, then sometimes the opposite can happen and the COLA can overcompensate people because it's catching up for that reason you laid out. So regardless of what inflation does, people have to wait until September or

October to find out what the increase is going to be. Yeah, the COLA doesn't always perfectly keep up with inflation in the moment, but over time it will catch up generally if not the next year, the year after. There's a mechanism where it basically catches up over the inflationary cycle. Peter Robinson Looking more broadly at retirees' portfolios, how have their other investments fared? Sarah Bruckner If you're a retiree who, theoretically, if

your entire retirement income is Social Security, then your income has kept pace with inflation over the last couple years. Maybe not perfectly, maybe not every year in a perfect way, but it catches up over time. But if you have a pension, then chances are that pension has not kept pace with inflation because private sector companies, their pensions often don't have any kind of cost of living adjustments. So you get what you get and inflation will really erode the value of that pension. Public sector pensions, often there is an adjustment, but sometimes it's capped at like two or three percentage points a year. So for those people,

when you had 9% inflation in 2022, if your public sector pension is rising by 3%, that's not going to keep you even. So where retirees have done really well, aside from Social Security, is with investing in stocks. The stocks have done very well over the last couple of years on average. Since the pandemic began, both bonds and cash have kind of lagged behind inflation. How do Medicare costs factor into the social security increase? Medicare Part B premiums are deducted from social security checks for a lot of social

security recipients. And so when the Medicare premium rises by a lot, then sometimes it feels like there's not enough left over for people to feel like they've had like a meaningful increase. And this year, the Medicare trustees released a report back in the spring that projected it'll increase to about $185 a month, and that's up from about $175 a month. So it's about a $10 increase that they're projecting. So if you look at on average, the average social security recipient will get a $50 a month increase. Well, $10 of that is going to be eaten up.

It's 20% of the increase being eaten up by Medicare. Right, exactly. That's WSJ reporter, Ann Turgeson. And that's it for your Money Briefing. This episode was produced by me, JR Whalen, with supervising producer, Melanie Roy. Thanks for listening.