Whether you’re just starting out or already retired, Social Security is likely to help you make ends meet in your golden years.
Gallup found that 89% of current retirees depend on Social Security as a “major” or “minor” source of income. Meanwhile, 85% of non-retirees expect to rely on Social Security after they retire. Both values are near-record highs.
Given the importance of Social Security to tens of millions of primarily senior Americans, it’s no surprise that the COLA is the most-anticipated annual news.
What Is the Social Security Cost-of-living Adjustment?
COLA is the annual “raise” that recipients receive. You’ll see I’ve put “raise” in quotation marks, which means this isn’t a true raise. The COLA for Social Security is intended to account for recent inflation.
Ideally, benefits should increase in lockstep with rising costs for goods and services. Even though it’s nominal (i.e., “rise”) in their monthly check, COLA keeps Social Security claimants in line with inflation.
Prior to 1975, Congress granted COLAs at random special sessions. Since then, the program’s annual inflationary tether has been the CPI-W.
The CPI-W has eight major spending categories and many subcategories, each with its own weighting.
A big preset basket of products and services can be broken down into a single CPI-W figure that helps us analyze pricing trends (i.e., whether inflation or deflation is occurring).
That only the third quarter (July-September) numbers count for the upcoming year’s COLA computation. The other nine months’ CPI-W figures can help identify trends, but they won’t affect Social Security’s COLA.
Calculating Social Security’s COLA for the future year is simple if you know the BLS’s Q3 CPI-W figures. Inflation occurs when the average Q3 CPI-W reading is higher than the previous year’s average Q3 CPI-W reading.
The “rise” is equal to the year-over-year percentage increase, rounded to the closest tenth.
Want the Highest Benefit Increase Since 1982?
Since 2004, Social Security’s COLAs have been modest or non-existent. Because the CPI-W fell in 2009, 2010, and 2015, no COLA was paid to beneficiaries in those years (2010, 2011, and 2016). But 2023 may deliver a benefit rise unprecedented in generations.
The Senior Citizens League (TSCL), a nonpartisan senior advocacy group, recently predicted a 7.6% COLA for 2023. This would be the fifth-largest COLA since the CPI-W became the annual inflationary anchor in the mid-1970s.
What does a 7.6% COLA mean for retirees? By December, I expect the average retired recipient to earn $1,636 per month. A 7.6% increase in January 2023 would be an extra $124 per month or over $1,500 per year.
Reason for predicted historic increase in Social Security benefits: Soars inflation. In February, the BLS reported a 7.9% year-over-year increase in the CPI-U, a 40-year high. The CPI-U measures inflation like the CPI-W.
Every major CPI-U spending category has grown in price over the past 12 months, until February 2022. Gasoline prices are up 38%, new and used car prices are up 14% and 41%, respectively, and housing costs are up 4.7% year-on-year. The shelter is the CPI-heaviest U’s item.
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This Is a No-win Situation for Social Security Recipients
A near-$125 monthly boost in Social Security benefits for 2023 seems wonderful on the surface. But there’s more to it.
As said, the COLA isn’t meant to help people get ahead. It’s only a mechanism to keep program participants up to date with inflation. The highest pay raise in 41 years sounds great until you remember that inflation is also nearing 40-year highs.
Worse, since the turn of the century, the purchasing power of Social Security payments has progressively declined. TSCL found that since 2000, Social Security payouts have lost 32% of their purchasing power.
That is, what $100 in benefits bought in 2000 currently only buys around $68 worth of goods and services. Even a 7.6% COLA in 2023 won’t rebalance the scales in favor of beneficiaries.
The real issue for Social Security is that the CPI-W doesn’t accurately measure inflation for most beneficiaries.
The CPI-W tracks the spending habits of urban and office workers. These are persons of working age who spend money differently from the bulk of Social Security recipients.
The CPI-W tends to underweight critical costs for the elderly like housing and medical care while overweighting less important items like education, clothing, and transportation.
Even Congress recognizes that the CPI-W as Social Security’s inflationary tether does seniors a disservice. Unfortunately, none of America’s major political parties is ready to give an inch to establish common ground, thus no solution is in sight.
In short, no matter how much COLA beneficiaries receive in 2023, Social Security income is likely to lose purchasing power over time.
Most Retirees Ignore the $18,984 Social Security Bonus
Like most Americans, you’re behind on your retirement savings. But a few “Social Security secrets” may help you increase your retirement income. For example, one simple method might add up to $18,984 each year!
After learning how to optimize your Social Security benefits, we believe you may retire with the confidence we all seek.