Social Security checks could skyrocket in 2023: Here’s how much extra seniors could get | Smart Change: Personal Finances
For better or worse, Social Security is our nation’s most vital social program. It is responsible for lifting 22.5 million people out of poverty each year and is expected to play a vital role in helping non-retirees make ends meet during their golden years. A recent survey by national pollster Gallup found that 84% of non-retirees plan to rely on Social Security as either a “major” or “minor” source of income when they retire.
Given the importance of the program to the financial well-being of tens of millions of Americans currently in retirement, there is perhaps no announcement more universally awaited than the annual adjustment to the cost of life (COLA) social security.
Understanding the Social Security Cost of Living Adjustment
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The Social Security COLA is an “increase”, but not in the real sense of the word. This is an annual benefit increase that is passed on most years and is designed to help recipients keep up with inflation (i.e. the rising cost of goods and services they buy). That’s why “increase” is in quotes, because the COLA is not intended to help recipients progress.
Since 1975, the consumer price index for urban wage and office workers (CPI-W) has served as the inflationary link for social security. The CPI-W has eight major expense categories and dozens and dozens of sub-categories, each with its own respective weighting. This allows for a concise reading of CPI-W that can be easily compared to the previous year to determine if inflation or deflation is present.
One of the coolest things about Social Security’s COLA is that only a small portion of the year determines how much of a “raise” program recipients will receive. Only the readings from the third quarter (July to September) influence the Social Security COLA for the coming year. That means we’re about to enter the months that matter for America’s top social program.
Social Security checks set for historic increase in 2023
Even though the other nine months won’t factor into the Social Security COLA calculation, they can still offer some big clues about what to expect in the coming year. As for 2023, the tea leaves imply a historic monthly increase in payments.
According to Mary Johnson, a social security policy analyst at the Senior Citizens League (TSCL), a nonpartisan seniors advocacy group, the annual COLA for 2023 “could be around 8.6%.” If that figure materializes, it would be the largest year-over-year percentage increase in monthly benefits in 41 years and the largest increase in nominal dollar payments in history.
Based on the latest snapshot provided by the Social Security Administration, the nearly 47.7 million retirees receiving a monthly benefit earned an average of $1,666.49 in April. In December, I estimate that monthly payment will increase to $1,683. The roughly $2/month increase in average payouts through December is a function of newly retired workers joining the benefit pool each month.
If Johnson’s COLA estimate proves accurate, the average retired worker can expect their monthly benefits to increase by about $145 in 2023, or nearly $1,740 in additional income next year. Similarly, the average disabled worker benefit and average survivor payment would increase by more than $117/month and $114/month, respectively, over the coming year.
Soaring benefits won’t make up for shortcomings in social security
On the face of it, an average increase in retired worker benefits of $145/month would probably make seniors pretty happy. But all is not as it seems – even with historic profit increases seemingly on the horizon.
As noted, the Social Security COLA is not a tool designed to help recipients get ahead. If they receive a significant year-over-year increase, it’s because the cost of everyday goods and services has increased by an equally staggering amount. Energy, food and housing costs have all risen at an alarming rate and threaten to eat up most or all of retirees’ COLA in 2023.
But there’s an even bigger problem, and it has to do with Social Security’s inflationary link, the CPI-W.
As the full name of this inflation measurement index suggests, it tracks the spending habits of “urban wage earners and office workers.” These are typically working-age Americans who don’t receive Social Security benefits and who spend their money very differently from the older people who make up the bulk of the program’s recipients.
For example, spending on medical care and housing accounts for a higher percentage of total spending for seniors than for working-age Americans. Conversely, the costs of education, clothing and transportation are higher for American workers than for the elderly. But because the CPI-W is skewed toward urban wage earners and office workers, it underweights crucial costs for retired workers, while increasing the weights for less important expenses.
Since 2000, TSCL reports that the purchasing power of Social Security income has declined by 40%. An estimated COLA of 8.6% in 2023 will not help retired workers make up much, if any, of what they have already lost.
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