Who’s Ready to Increase Your Social Security Benefit by $145 a Month? | personal financing

Last month, the national pollster Gallup conducted a survey of currently retired workers and non-employees to get an idea of ​​how important, or expected to be, Social Security income in their golden years. According to the findings, 89% of current retirees rely on their Social Security income to varying degrees to make ends meet, while 84% of non-retirees expect it to be a “primary” or “secondary” source of income during retirement. .

Given how important Social Security is to the financial well-being of tens of millions of retired beneficiaries, it’s perhaps not surprising that the annual cost of living (COLA) adjustment has been the most anticipated announcement of the entire year.

Think of Social Security’s COLA as a “raise,” but not a traditional raise designed to help people move forward. Instead, Social Security’s COLA is a way to ensure program recipients receive a payment to keep up with rising prices for goods and services (i.e., inflation).

Prior to 1975, these heights were arbitrarily handed over through special sessions of Congress. Since then, the Consumer Price Index for Urban and Clerical Workers (CPI-W) has been an inflationary loop for the program. CPI-W contains eight major spending categories, as well as dozens and dozens of subcategories, each with their own percentage weights. It is these weights that allow us to accurately and accurately describe whether prices are rising or falling with a single CPI-W reading.

Interestingly, Social Security’s COLA is determined solely by CPI-W readings from the third quarter (July through September). Although CPI-W readings from the other nine months are not used in the COLA calculation, they are still useful in identifying inflationary or deflationary trends.

Without excessive complexity, if the average CPI-W reading from the third quarter (Q3) of the current year is higher than the average CPI-W reading from the third quarter of the previous year, inflation has occurred and recipients will have a plus”. The amount of increase in benefits is simply the percentage annual increase in average CPI-W readings, rounded to the nearest tenth of a percent. It’s pretty straightforward.

What is not clear is what is happening on the inflation front at the moment. In April, the US Bureau of Labor Statistics reported a 12-month delayed inflation rate of 8.3%. This was actually lower than the 8.5% inflation rate reported in March, which hit a 40-year high.

If you are wondering why inflation is so high, the answer lies in two factors. First of all, the country’s central bank left its foot on the accelerator for too long, leading to historically low interest rates and a bond-buying program (known as quantitative easing) designed to dampen long-term Treasury yields to encourage them. lending.

We have also seen a spike in commodity prices in the wake of the COVID-19 pandemic and after Russia’s invasion of Ukraine. Supply chains are disrupted in many industries around the world, and no immediate relief for crude oil or natural gas supplies is in sight.

For Social Security recipients, it means one thing: a big increase in monthly benefits is on the horizon.

According to a recent report from the nonpartisan advocacy group The Seniors’ League (TSCL), COLA for next year could reach 8.6%. And on a percentage basis, this would be the largest year-over-year interest increase in 41 years. But on a nominal dollar basis, it would represent the largest “increase” ever.

As of April 2022, the average retired worker taking home was $1,666.49 per month. By the end of the year, I estimate that this average payment, which grows by about $2 each month as new retirees enter the benefit pool, will increase to approximately $1,683. An 8.6% COLA over this amount would result in an increase of $145 per month in retired worker benefits to $1,828 by January 2023.

On the face of it, the average benefit hike of $145 per month for retired recipients would probably excite people. But the unfortunate fact is that the inflation that older people are facing has significantly outpaced the inflation rates they have received over the past 22 years.

Marie Johnson, Social Security Policy Analyst at TSCL, compared the cumulative cumulative amount of COLA for seniors since 2000 to the COLA that has been necessary to keep pace with inflation since the turn of the century. While COLA has cumulatively increased 64% since 2000, typical seniors’ expenditures have grown 130%. Based on an average monthly Social Security benefit of $816 per month in 2000, the value of today’s seniors has been reduced by approximately $540 per month over the past 22 years. That’s roughly $6,500 annually in lost purchasing power.

The purchasing power of Social Security income has fallen 40% since the turn of the century for one main reason: The CPI-W does a poor job of accounting for the inflation that retired workers face.

As the full name suggests, it is an indicator that caters to the wages of cities and clerical workers. These are typically working-age Americans who spend their money differently than older adults. As a result, CPI-W tends to reduce critical spending categories for elderly Americans, such as Medicare and housing, while giving additional credence to less critical expenditures, such as transportation, education, and clothing.

The real kick in the pants is that Capitol Hill lawmakers agree that CPI-W is flawed — they can’t agree on how to fix it. Both Democrats and Republicans have proposals that they think would be an improvement, but neither party was willing to concede an inch to find common ground with their opponent.

Even with probably the largest increase in nominal dollar benefits in history by 2023, retired workers, unfortunately, don’t have much to celebrate.

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