In just 12 days (October 13, 2022 at 8:30 a.m. ET), the more than 65 million Social Security beneficiaries will know exactly how much their monthly benefits will increase in 2023. For most of the 48.1 million hard-working retirees receiving a Social Security check, unveiling the cost-of-living adjustment (COLA) is the biggest announcement of the year.
Unfortunately, it’s also an ad with a long history of disappointment.
Why is Social Security’s Cost of Living Adjustment (COLA) so important?
Social Security’s COLA is best thought of as a way for the program to account for inflation—the increase in the price of goods and services. Since so many seniors rely on their Social Security income to make ends meet in retirement, it would make sense for their monthly payment to increase in line with inflation so they can continue to purchase the same basket of goods and services. COLA is the “increase” that takes inflation into account.
You’ll notice by the use of quotation marks around “raise” that this pay increase is not a traditional raise, such as the type you would receive from an employer. Since this benefit increase is designed to keep pace with inflation, it will never help beneficiaries get ahead like a true pay raise.
For the past 47 years, the Consumer Price Index for Urban Salaried and White-collar Workers (CPI-W) has served as the inflationary tether of the program. It has eight main expense categories and a small mountain of subcategories, each with their own respective weighting. These weights are important because they allow the CPI-W to be expressed as a single figure that can be easily compared to the prior month or prior year period to determine whether the aggregate price of a predetermined large basket of goods and services has increased. or not. refused
Calculating the Social Security cost-of-living adjustment is pretty straightforward. The average CPI-W reading for the third quarter of the current year (July to September) is compared to the average CPI-W reading for the third quarter of the previous year. If the value increases year after year, inflation has set in and Social Security checks will get a boost next year. The “increase” amount is the year-over-year percentage increase in the average CPI-W reading, rounded to the nearest tenth of a percent.
A historic increase in the US inflation rate will cause Social Security benefits to skyrocket in 2023. US inflation rate data by YCharts.
Social Security checks should see record ‘increases’ in 2023, but will still disappoint
Based on the July and August CPI-W inflation data that has already been announced, recipients would expect a large COLA of 8.8% in 2023. But note that we do not yet have the September inflation data, which is the last riddle. necessary piece to concretely calculate the “increase” for the next year.
According to Mary Johnson, a Social Security policy analyst at the nonpartisan senior advocacy group The Senior Citizens League (TSCL), the final cost-of-living adjustment is estimated to be 8.7%. On a percentage basis, this would mark the largest annual increase in payments since 1982. But on a nominal dollar basis, it will be the largest increase in Social Security’s 87-year history.
While the percentages are fun to watch, the record-breaking 2023 “raise” really hits home when you see what it will do with Social Security checks. Based on projected payments for December 2022, the average retired worker should receive an additional $146 per month in January. The average disabled worker and survivor are expected to see their checks increase by $119/month and $116/month, respectively, in 2023.
However, recipients may not be able to keep much of their “increase.” Keep in mind that the only reason the cost-of-living adjustment is expected to peak at 41 years is that the US inflation rate has skyrocketed. With the cost of food, housing, energy, and health care far exceeding their historical norms, much of this extra money could be flowing out of the checking accounts and wallets of retirees who depend on Social Security to make ends meet.
Not even a record COLA will solve this problem for retirees
But the historically high inflation that consumes next year’s COLA isn’t even the biggest problem for retirees. The elephant in the room is what has been happening to the purchasing power of Social Security income since the turn of the century.
In May, a TSCL press release noted that, among other things, the purchasing power of Social Security dollars had decreased by 40% since 2000. To put this in context, what $100 in income used to buy of Social Security in 2000 can now buy only $60 of those same goods and services.
How does this amount of purchasing power erosion occur in just 22 years? Look no further than CPI-W for the answer.
Although linking Social Security to the CPI-W in 1975 was a much better solution for passing cost-of-living adjustments than arbitrary sessions of Congress (which was the primary method of passing COLAs prior to 1975), the CPI-W has it failed miserably to account for the rising costs faced by older people since 2000. That’s because, as its full name alludes, it tracks the spending habits of “urban wage earners and white-collar workers.” These are generally working-age people who do not receive a Social Security benefit. More importantly, they spend their money very differently than the retirees who make up the bulk of Social Security recipients, which has resulted in key expenses, like housing and health care, being underestimated in the annual calculation of TAIL.
Perhaps the most frustrating aspect of the CPI-W failure is that lawmakers from both parties agree that it is not working as intended, but cannot find common ground on how to replace it. With no compromise on Capitol Hill, the grim reality for seniors is that the purchasing power of their Social Security income is sure to continue to decline no matter how high the COLA is in 2023 or beyond.
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