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Seniors on Social Security Might Have to Reduce Their Spending in 2024. Here's Why.

By Maurie Backman – Mar 22, 2023 at 1:01AM

Key Points

  • Data shows that recent spending among older Americans has increased, which may be due to this-year's large Social Security raise.
  • Next-year's boost will likely be smaller, so senior consumers may need to cut back.

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It's something older Americans should prepare to do.

Many seniors get most of their monthly income from Social Security. And for some people, those benefits represent all of their retirement income.

That's not an ideal scenario. It's better to have a healthy nest egg to fall back on in retirement and let Social Security serve as just one of several sources of income. But for many seniors, those monthly benefits do a lot. And when those benefits increase, it gives seniors more buying power.

This may be the case today. Recent data from Bank of America shows that spending has picked up more among older Americans since November than any other age group.

A person at a supermarket holding a shopping basket.

Image source: Getty Images.

Some of that may have occurred because this age group is seeing higher costs -- notably in healthcare, which is commonly a big expense for older Americans. But some seniors may be taking more liberties on the spending front due to having more money from Social Security. And that's not necessarily great because many seniors need to seize the opportunity to bank some cash reserves this year.

When a large raise goes a long way

In 2023, Social Security beneficiaries received an 8.7% cost-of-living-adjustment (COLA). That's the largest increase to come down the pike in decades. It might also explain why spending is up among seniors -- they can finally afford it, even with inflation continuing to surge.

While Social Security recipients may have gotten a large raise in 2023, they shouldn't expect a repeat in 2024. They should anticipate a reduction in spending to compensate.

Next-year's COLA may be lower

Social Security COLAs are calculated based on third-quarter data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Because inflation surged so much in 2022, it allowed for a giant raise in 2023.

Inflation is still a problem for consumers this year. It's a problem for the Federal Reserve, too. But in February, the CPI-W increased just 5.8% from the previous year.

Clearly, just is a relative term here. But since this-year's COLA seems to be outpacing inflation, there's a chance that next-year's COLA could be negligible. Or seniors on Social Security may not get a COLA at all.

That's not necessarily a bad thing, as it means that the pace of inflation is slowing. But still, seniors who get a lot of their income from Social Security commonly rely on COLAs to stay afloat. To not get one at all in 2024 after such a massive raise in 2023 could be devastating to many older Americans.

That's why, rather than spending all of that extra money, seniors who are enjoying a boost to their Social Security income right now should make an effort to save some of it. Historically, Social Security COLAs have done a poor job of helping seniors keep pace with inflation, so those who are receiving benefits shouldn't expect that pattern to reverse in the coming years.

Bank of America is an advertising partner of The Ascent, a Motley Fool company. Maurie Backman has positions in Bank of America. The Motley Fool has positions in and recommends Bank of America. The Motley Fool has a disclosure policy.

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