Who’s ready for the biggest increase in Social Security benefits in 41 years? | Smart Change: Personal Finances
Whether you’ve just entered the workforce or are already retired, Social Security is likely to play a key role in helping you make ends meet during your golden years.
According to a 2022 survey by national pollster Gallup, 89% of current retirees rely on their monthly Social Security payment as a “major” or “minor” source of income. Meanwhile, 85% of non-retirees plan to depend on Social Security income to some degree after they hang up their work coats for good. Both of these figures are close to historic highs.
Given the critical role Social Security plays for tens of millions of mostly retired Americans, it’s no surprise that the program’s Cost of Living Adjustment (COLA) is the announcement the most anticipated each year.
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What is the Social Security cost of living adjustment and how is it calculated?
Simply put, COLA is the “boost” that beneficiaries receive almost every year. You’ll notice I have “increase” in quotes, which means it’s not an increase in the truest sense of the word. The purpose of the Social Security COLA is to account for inflation that program recipients have faced over the past year. If the prices of goods and services increase, benefits should ideally increase at the same rate to match these increases. Thus, the COLA is more about keeping Social Security recipients on par with inflation, even if it’s a nominal increase (i.e., “increase”) in their monthly payment. .
Prior to 1975, Social Security COLAs were arbitrarily approved by special sessions of Congress. But since then, the consumer price index for urban wage and office workers (CPI-W) has served as the program’s annual inflation link.
The CPI-W has eight major expense categories and dozens and dozens of subcategories, all with their own individual weightings. These weights allow us to take a large pre-determined basket of goods and services and break it down into a single CPI-W reading that helps us easily understand what is going on with prices (i.e. if the inflation or deflation occurs).
The interesting thing is that only the readings from the third quarter (July through September) are taken into account in calculating the Social Security COLA for the coming year. While the CPI-W readings for the other nine months can be helpful in identifying trends, they will have no effect on Social Security’s COLA.
Once you have the third quarter (Q3) CPI-W readings from the US Bureau of Labor Statistics (BLS), calculating the Social Security COLA for the coming year is simple. If the average CPI-W reading of the current year’s Q3 is higher than the average CPI-W reading of the previous year’s Q3, inflation has occurred and beneficiaries get a ” increase”. The amount of the “increase” is proportional to the percentage increase year over year, rounded to the nearest tenth of a percent.
Who’s ready for the biggest leap forward since 1982?
For much of the past 12 years, Social Security COLAs have been small or non-existent. In 2009, 2010 and 2015, the CPI-W decreased year on year, so that no COLA was transmitted to the beneficiaries in the following years (2010, 2011 and 2016). But 2023 could bring an increase in benefits not seen for several generations.
Recently, the Senior Citizens League (TSCL), a non-partisan senior citizens’ advocacy group, suggested that the COLA for 2023 could reach 7.6%. If correct, it would be the largest year-over-year increase in Social Security benefits since 1982 (11.4%), and it would be the fifth-largest COLA since the CPI-W became the annual inflation link in the mid-1970s.
What would a COLA of 7.6% mean for the average retiree? By December, I estimate the average retired beneficiary will be making about $1,636 per month. A 7.6% increase in benefits in January 2023 would equate to an additional $124 per month or nearly $1,500 more for the full year.
The reason for this estimated historic jump in Social Security benefits is simple: inflation is skyrocketing. In February, the BLS reported a 7.9% year-over-year increase in the consumer price index for all urban consumers (CPI-U), which marked a 40-year high. . The CPI-U is a measure of inflation similar to the CPI-W.
Prices for every major CPI-U expenditure category rose over the 12-month period to February 2022. Gasoline prices rose 38%; prices for new and used vehicles rose 12.4% and 41.2%, respectively; and with house prices soaring, shelter costs rose 4.7% from a year earlier. Housing is the most important weighted element of the CPI-U.
Sounds like a no-win scenario for Social Security recipients
Superficially, an increase of nearly $125 a month in Social Security benefits for 2023 probably sounds good. But all is not what it seems.
As stated, the Social Security COLA is not intended to help recipients get ahead. It is simply a tool designed to keep program recipients on par with inflation. The biggest payout increase in 41 years sounds fantastic until you realize that most or all of that increase is likely to be eaten up by inflation which is also hitting 40-year highs.
To make matters worse, the purchasing power of Social Security dollars has been steadily declining since the turn of the century. According to a report by TSCL, Social Security benefits have lost 32% of their purchasing power since 2000. In other words, what $100 of benefits could buy in 2000 will now only buy about 68 $ of these same goods and services. Even a COLA of 7.6% in 2023 cannot swing this pendulum back in favor of beneficiaries.
The real problem for Social Security is that the CPI-W does not do a good job of measuring inflation for the majority of program recipients.
As its full name suggests, the CPI-W tracks the spending habits of urban and office workers. These are people who are generally of working age and who spend their money very differently from older people who make up the majority of Social Security recipients. As a result, the CPI-W tends to underweight important costs for the elderly, such as housing and medical care, while giving additional weight to less important categories of expenditure, such as education, health care. clothing and transportation.
Interestingly, even congressional lawmakers recognize that the CPI-W does a disservice to the elderly as an inflationary tie to Social Security. Unfortunately, given that the two major American political parties are approaching a solution from opposite ends of the spectrum and neither side is willing to give an inch to find common ground, there is no solution to this dilemma on the horizon.
In short, regardless of the number of COLA beneficiaries likely to receive in 2023, the purchasing power of Social Security income is expected to continue to decline over time.
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