How the 2024 Cost-of-Living Adjustment Impacts Americans Living Abroad
With inflation down from recent peaks but still elevated, Social Security beneficiaries are set to receive a 3.2% cost-of-living adjustment (COLA) in 2024. Although less than the historic 8.7% COLA in 2023, the 2024 cost-of-living adjustment will help beneficiaries keep up with rising costs.
For U.S. expats who currently receive Social Security benefits or are approaching eligibility, it’s crucial to understand how the Social Security Administration calculates the COLA and how the 2024 COLA affects their benefits and claiming strategy.
How is the Social Security COLA calculated?
The COLA is based on a subset of the Consumer Price Index (CPI) called the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). To determine the COLA, the Social Security Administration calculates the difference between the average price of the CPI-W in the third quarter of the current year and its average price in the third quarter of the previous year. The percentage increase is then applied to benefits for the upcoming year’s benefits. If the difference in the average CPI-W from one year to the next is 0% or less, a 0% COLA is applied to the following year’s benefits (the last 0% COLA was in 20161).
How does the COLA impact my Social Security benefits?
If you’re already receiving Social Security, the COLA is automatically applied to your current-year benefits beginning in January. For example, if you received $2,500 in benefits per month in 2023, your monthly benefit beginning in January 2024 will increase to $2,580 ($2,500 x 1.032).
For beneficiaries who have reached age 62 and not yet filed for Social Security, you’ll likely be eligible for the COLA. However, the calculation method is a bit different. The COLA applies to the primary insurance amount (PIA), which is the benefit amount you would be eligible to receive at your full retirement age (FRA). Your Social Security benefit estimates at different claiming ages are then based on your updated, COLA-adjusted PIA.
It’s also important to know that your Social Security PIA is calculated using your highest 35 years of earnings. Those earnings are also indexed for inflation. Therefore, future Social Security recipients who haven’t yet reached age 62 will experience an adjustment to their past earnings to reflect changes in average national wages and standards of living over time.2
How does my foreign pension impact the Social Security COLA?
If you qualify for Social Security retirement benefits and a retirement pension from a job in which you didn’t pay into Social Security, you may be impacted by the Windfall Elimination Provision (WEP). Under this provision, your pension would be considered “non-covered.” Many foreign pensions fall into this category. Generally, the WEP reduces your PIA based on your years of substantial Social Security earnings. In addition, if your spouse is claiming a spousal Social Security benefit (up to 50% of the primary worker’s benefit), his or her spousal benefit would be based on your benefit after the WEP has been factored in.
The good news is that even if you’re subject to the WEP, you’re still eligible to receive Social Security COLAs. Also, survivor benefits aren’t affected by the WEP, which would be removed for your spouse (including non-U.S. or foreign spouses) or other family members if you were to pass away. Finally, if you have 30 or more years of substantial Social Security earnings, you aren’t subject to the WEP and are eligible to receive your full benefit.
How does the Social Security COLA affect my claiming strategy?
The COLA should have little to no impact on your claiming strategy. Because your benefits are automatically adjusted to keep up with inflation, there’s no reason to claim benefits early to receive the increase. If you’re already receiving benefits, the COLA will be applied to your 2024 benefits beginning in January.
How does my Social Security claiming strategy fit into my financial goals?
When you delay receiving Social Security benefits past your full retirement age (FRA), those benefits grow by 8% annually until age 70, when your maximum benefit amount is reached. On the flip side, if you begin taking benefits before your FRA, those benefits are reduced. This reduction can be up to 30% if you decide to file at age 62. The increase from delayed credits, as well as the decrease from early filing, is after the COLA, which was first applied to your PIA.3
The decision of when to begin taking Social Security benefits can have a lasting impact on both you and your family, and COLAs shouldn’t be part of your decision-making process. Instead, your strategy should be based on your personal financial goals, life expectancy, retirement savings, other sources of retirement income and tax liability.
For example, if you’re considering implementing a series of Roth conversions during the period from retirement until age 73 or 75, when your required minimum distributions (RMDs) kick in, Social Security can have an impact. Because up to 85% of Social Security benefits are subject to federal tax (and potentially state tax), claiming benefits too early can increase your adjusted gross income and make Roth conversions a less attractive strategy.
How do I develop a Social Security strategy as an U.S. expat?
Because each individual’s financial situation is unique, developing an effective Social Security strategy can be a multifaceted and complex decision. Instead of letting COLA announcements impact your decision, it’s important to work with a qualified wealth manager to establish a strategy that makes sense, given your particular financial situation.
Need some help navigating your Social Security benefits as an expat living overseas? Creative Planning International is here for you. We work with U.S. expats and cross-border families to help maximize their wealth and avoid costly mistakes. We understand the complex interaction of multi-jurisdiction tax and regulatory regimes and take into account currency, diversification and other portfolio considerations as we help implement custom retirement and tax planning strategies to meet your specific needs.
To learn more, request a meeting with a member of our team.