You are likely going to be reliant on Social Security income when you retire, regardless of whether or not you realize it.
Gallup surveyed retired workers and nonretirees to find out how important Social Security income is to them in their golden years. According to the results, 89% of current retirees lean on their Social Security income to some degree to make ends meet, while a combined 84% of nonretirees anticipate it to be a major or minor source of income.
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Considering how important Social Security is to the financial well-being of tens of millions of retired beneficiaries, the annual cost-of-living adjustment is the most-awaited announcement of the entire year.
Think of Social Security's COLA as a raise, but not a traditional one designed to help people get ahead. Social Security's COLA is used to ensure that the program's beneficiaries are given a boost to keep up with the rising price of goods and services.
Special sessions of Congress gave out these benefit hikes. The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) has served as the program's inflationary tether. There are eight major spending categories, as well as dozens of subcategories, each of which has its own percentage weighting. We can concisely describe whether prices are rising or falling with a single reading.
Social Security's COLA is determined by the readings from the third quarter. The readings from the other nine months can still be used to identify inflationary or deflationary trends.
If the average inflation reading from the third quarter of the current year is higher than the average inflation reading from the previous year, beneficiaries will receive a raise. It's pretty straightforward.
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What is happening on the inflation front is not straightforward. The Bureau of Labor Statistics reported that the inflation rate hit 8.3% in April. The inflation rate in March was 8.5%, which was a 40-year high.
The answer is a couple of factors. The nation's central bank left its foot on the pedal for too long, resulting in historically low interest rates and a bond-buying program that was designed to weigh down long-term Treasury bond yields to encourage lending.
Commodity prices have gone up in the wake of the COVID-19 Pandemic and the invasion of Ukraine by Russia. There is no immediate supply relief for crude oil or natural gas because of broken supply chains.
A huge monthly benefit increase is on the way for Social Security beneficiaries.
The Senior Citizens League, a nonpartisan senior advocacy group, said in a recent report that the cost of living could hit 8.6% in the upcoming year. It would be the largest benefit increase in 41 years. It would be the largest raise ever on a nominal-dollar basis.
The average retired worker took home $1,666.49 per month. By the end of the year, I think the average payouts will rise to $1,683 as new retirees enter the benefit pool. An 8.6% COLA on this amount would result in a $145 per-month increase in retired-worker benefits.
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People would probably be excited by an average benefit increase of $145 per month. The inflation seniors are facing has vastly outpaced the COLAs they have received for the past 22 years.
Mary Johnson compared the cumulative COLAs seniors have been given since 2000 to the cumulative COLAs that would have been necessary to keep pace with inflation since the start of the century. Senior expenses have grown by 130% since 2000 when COLAs have cumulatively risen. The average monthly Social Security benefit in 2000 was $816, but seniors have been shortchanged by $540 a month over the past 22 years. Losing purchasing power is close to $6,500 a year.
The purchasing power of Social Security income has fallen since the beginning of the century due to the poor job of accounting for inflation.
It is an index for urban wage and clerical workers. These are people who spend their money differently than senior citizens. Critical spending categories for aged Americans, such as medical care and housing, are often underweight by the CPI-W.
Lawmakers on Capitol Hill agree that the CPI-W is flawed, but they can not agree on how to fix it. Neither party has been willing to compromise in order to find common ground with their opponent.
Even with the largest nominal-dollar benefit increase in history likely on the horizon, retired workers have little to celebrate.
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