What Does the Modest Social Security Increase Mean?

 

The recently announced increase in the Social Security cost-of-living adjustment (COLA) for 2024 is much more modest than the one announced just a year ago. But milder or not, it has meaning. So what does it mean?

 

The milder-than-last-year hike in the Social Security COLA is due to the relative slowing of inflation, says Mindy Yu, Director of Investing at Betterment at Work. “It's worth noting that the 3.2% increase falls significantly short of the record-breaking 8.7% increase seen in 2023—when we were seeing record-high levels of inflation,” says Yu. 

 

 

So what does a lower increase mean for Social Security recipients? 

 

It’s going to have a “relatively modest” influence on them, Yu says. 

 

But maybe not for everyone, Yu suggests. “While it’s encouraging to see these bumps, it may not suffice for retirees who are already concerned that their retirement income won’t be enough to cover essential living expenses,” she says.

 

And Yu may be on to something, given the finding in Bank of America’s 13th annual Workplace Benefits Report that 67% of employees believe the cost of living is outpacing growth in their salary or wages. Further, says that study, despite the slowing of inflation, the percentage of employees with that view is higher than it was in February 2022, when it stood at 58%. 

 

 

The more modest increase has meaning beyond a slowing of inflation, Yu says. It also portends negatively about the future of the Social Security system itself, she argues. 

 

“The shrinking adjustment number adds to existing concerns about the future of Social Security,” says Yu. And that has further implications, she suggests, remarking, “With dwindling traditional safety nets (i.e. pensions), it’s also clear that retirement savers can’t simply rely on Social Security to fund a comfortable, secure retirement.”

 

 

Perhaps the increase in Social Security rates has slowed, and Social Security faces longer-term challenges—but that doesn’t mean that recipients are helpless. Yu outlines steps they can take.

 

Reevaluate. “Given the limitations around Social Security, it’s time for retirement savers who are still in the workforce to reevaluate their savings strategy,” says Yu.   

Yu’s suggestion could be quite prescient, given the findings in the Bank of America report, which says in the last year, inflation and economic uncertainty has increased financial stress, and as a result many employees focus on short-term financial needs instead of saving for retirement. 

Enroll. Yu argues that recipients should make sure they’re enrolled in their company’s 401(k).  

 

Contributions. Individuals should contribute to their retirement accounts “modestly—at least 3-5%, and enough to meet an employer match if one is available,” says Yu. She continues, “While a 10-15% contribution rate is ideal, it’s not realistic for everyone—stowing away even a tiny portion of your paychecks can still grow into a healthy fund as you age, thanks to compounding interest.” 

 

Employer role. Employers can play a role, too, says Yu. They can do so by ensuring that they’re offering a 401(k) or another type of retirement plan, and counseling employees on best practices around retirement saving. 

 

Bank of America buttresses that suggestion—they report that 76% of employees and a whopping 96% of employers contend that employers are responsible for employee financial wellness.