Retirees have been significant contributors to consumer spending in 2023, buoyed by a substantial increase in Social Security. However, this trend might see a slowdown as the cost of living adjustment (COLA) is set to decrease next year.
Record Hike in COLA
In 2023, Social Security beneficiaries saw an 8.7% increase in COLA, the highest in four decades. This adjustment significantly boosted spending among older adults.
A Diminishing Impact
Despite this increase, the COLA for 2024 is projected to be just 3.2%. Experts anticipate that the impact on retirees’ spending power will lessen as a result.
Comparison With Inflation
The 2023 COLA surpassed the inflation rate, providing retirees with extra spending power. However, the 2024 adjustment aligns closely with expected inflation rates.
Diverse Income Sources
Retirees often have multiple sources of income, including pensions, allowing their spending to remain relatively strong despite COLA reductions.
Generational Spending Patterns
Data indicates that older generations significantly outspent their younger counterparts in 2023, with baby boomers and the silent generation leading in credit- and debit-card spending.
Baby boomers held around $80 trillion in assets in the second quarter of 2023, far surpassing the $14 trillion held by millennials.
Drawing Down Savings
Baby boomers have been withdrawing from their savings and checking accounts more slowly than younger generations, potentially indicating more available funds for future spending.
Spending Out of Necessity
Despite increased spending, analysts suggest that older adults may be spending more out of necessity due to rising prices rather than discretionary spending.
Healthcare and Home Repairs
Some spending may be attributed to delayed medical treatments and home repairs that were postponed during staffing shortages in previous years.
Impact of COLA on Beneficiaries
The 8.7% COLA resulted in an average increase of $146 per month for beneficiaries, while the 2024 adjustment is estimated to be around $50 a month.
Survey on Spending Habits
A survey by the Senior Citizens League found that 45% of older respondents spent less than $2,000 a month, 37% spent between $2,000 and $3,999, and 15% reported spending $4,000 or more.
Reliance on Social Security
Approximately 40% to 44% of seniors depend entirely on Social Security for their income, primarily spending on essentials such as housing, healthcare, and groceries.
Analysts are concerned about how long retirees can maintain this level of spending without depleting their savings.
Future Financial Health
Bank of America predicts a decline in older generations’ assessment of their financial health in six months, while younger generations have more positive expectations.
Spending to Narrow
Despite the anticipated decrease in COLA, Bank of America suggests that retirees will continue to outperform other age groups in spending, albeit by a narrower margin.
The Road Ahead
The decrease in COLA may lead to a reduction in retirees’ spending growth. The continued observation of these trends will be crucial to understanding the broader economic impacts.
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