2023 Social Security COLA: It’s Good News / Bad News Scenario | personal financing
For most retirees, Social Security is a financial lifeline they simply cannot do without. When national pollster Gallup conducted a survey of retirees earlier this year, it found that only 90% of recipients need Social Security income to make ends meet.
Given the importance of Social Security to the financial well-being of our nation’s seniors, no announcement is more anticipated than the annual Cost of Living Adjustment (COLA). This year’s announcement will come on October 13, 2022 at 8:30 a.m. ET.
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While 2023 COLA offers a lot of promise on the surface, it becomes more of a good news/bad news scenario when you really look for it.
What is the Social Security Cost of Living Adjustment (COLA) and how does it affect you?
Social Security’s COLA is a way for the program to calculate the inflation (ie, the rise in prices of goods and services) faced by beneficiaries. If the cost of purchasing goods and services increases from year to year, it is better for Social Security recipients to be able to afford the same amount of those goods and services with the income they receive from the program.
Social Security’s COLA is designed to pass an “increase” that represents this increase in costs from year to year. You’ll notice that the “increment” is in quotation marks to reflect that this is not an increase in revenue designed to help recipients move forward.
Since 1975, the Consumer Price Index for Urban Workers and Book Workers (CPI-W) has been a Social Security deflationary cycle. This is an index with eight major spending categories and dozens and dozens of subcategories, all of which have their own relative weights. In this way, CPI-W can be reduced to a single number that provides a clear year-on-year comparison showing whether prices are going up or down.
The most interesting aspect of the Social Security cost-of-living adjustment is that only the CPI-W readings from the third quarter (July through September) factor in the calculation. 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 are in the “increasing” row. The amount of “increase” is the percentage annual increase in the average Q3 CPI-W reading, rounded to the nearest tenth of a percent.
The good news: Social Security checks are expected to rise in 2023
Without a doubt, the most positive Social Security takeaway for 2023 will be the magnitude of the upcoming “surge.”
According to an August update from the high-level, nonpartisan advocacy group The Senior Citizens League (TSCL), 2023 COLA is expected to reach 9.6%. A 9.6% increase in Social Security checks would represent the largest year-over-year percentage increase in 41 years and the fourth largest since switching to CPI-W as the program’s inflationary chord in 1975.
What would a 9.6% cost-of-living adjustment look like for the average retired worker? The average monthly benefit for retired workers is expected to reach $1,683 in December 2022, with 9.6% of COLA payments increasing by approximately $162 per month, or approximately $1,940 for the entire year. On a nominal dollar basis, it would represent the largest annual increase ever.
The reason for this expected historic increase in Social Security checks is simple: inflation is rising. In July, the Consumer Price Index for All Urban Consumers (CPI-U) – (CPI-U is an inflationary measure similar to CPI-W) – was down 8.5% from a year earlier. This has resulted in a 44% increase in gasoline costs, a 15.2% increase in electricity expenditures, and an almost unfathomable 10.9% increase in food inflation as of July 2021.
If the TSCL forecast proves accurate, seniors should have plenty of extra money arriving in their bank accounts in less than four months.
The bad news: Patrons can probably kiss most or all of the ‘surcharge’ goodbye
And now for the bad news: Retirees will likely say goodbye to most or all elements of historic COLA in 2023.
While the idea of a nearly 10% increase in your monthly Social Security checks may have excited some recipients, keep in mind that the only reason COLA is up is that inflation has risen so dramatically over the past year. For seniors who make up the bulk of the more than 65 million Social Security beneficiaries, expenditures for shelter, food, energy, and medical care have risen at an accelerating pace. Even with an estimated 9.6% of COLA, there is no guarantee that the inflation seniors face will be fully offset by next year’s payment increase.
The other bad news for retired beneficiaries is that the purchasing power of their Social Security income has been declining rapidly since the turn of the century. A May report from TSCL found that the purchasing power of Social Security dollars has fallen 40% since 2000. What $100 of Social Security income could buy in 2000 can now buy only $60 worth of the same goods and services.
If you’re wondering how that’s possible, look no further than the CPI-W, which has proven to be a poor measure of the true inflation faced by older adults. As the official name of CPI-W suggests, this is an index that tracks the spending habits of urban workers and clergy. These are usually Americans of working age who do not receive Social Security benefits.
The end result is that basic expenses for seniors, such as shelter and medical costs, are not given enough weight. Conversely, less significant costs, such as clothing, education, and transportation, are overweighted by CPI-W.
Although lawmakers from both parties agree that CPI-W does a poor job of tracking the data that ultimately controls Social Security’s cost-of-living adjustment, they have been unable to find a common solution. Long story short, no matter how high the COLA rate is in 2023 (or later), it appears that the purchasing power of Social Security income is trending down further.
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