Social Security is an important part of the financial well-being of most Americans. According to a recent survey from national pollster Gallup, a combined 84% of nonretirees expect to rely on Social Security as a major or minor source of income in their golden years. The 89% of already retired seniors who rely on Social Security to make ends meet each month is similar to this.
The October cost-of-living adjustment (COLA) is one of the most anticipated announcements of the year because of its importance to most Americans.
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Think of Social Security's COLA as the raise that's passed along to the program's more than 65 million beneficiaries every year. I put "raise" in quotation marks because it's meant to account for the inflation program recipients have faced, and not to help them get ahead. If the price of goods and services goes up, Social Security benefits should go up with it.
Social Security's inflation tether has been the Consumer Price Index for Urban Wage Earners and Clerical Workers. Eight major spending categories and dozens of subcategories have their own percentage weights. The price changes for a huge basket of goods and services can be reported as a single, tidy figure that shows whether inflation or deflation is taking place.
Only the third quarter of the current year and the third quarter of the previous year are used to calculate Social Security's COLA. Social Security's cost-of-living adjustment calculation won't be affected by the other nine months of the year.
The amount of the increase is based on the year-over-year percentage rise in the average third-quarter reading of the consumer price index.
Social Security benefits could go up in price. US inflation rate by YCharts
Social Security's beneficiaries should see a big increase in their monthly checks. According to Mary Johnson, a Social Security policy analyst at The Senior Citizens League, the program's cost of living adjustment could be as high as 11.4% in 2023.
The average retired worker will take home $1,683 a month by December 2022. A monthly benefit increase of almost $192 will be achieved by an 11.4% COLA. The average retired worker will be able to make up to $1,875 a month in retirement.
Since 1975, there have only been two double-digit percentage annual COLAs. In 1981 and 1982, beneficiaries saw their payouts increase. If accurate, the peak forecast from Johnson would be the second- largest COLA in the modern era.
It wouldn't be close to a record if Social Security's entire history was taken into account. Special legislative sessions of Congress gave out cost-of-living adjustments in the past. Lawmakers voted to increase Social Security's monthly payouts 11 times between 1975 and 1940. Most of the increases resulted in double-digit percentage payouts.
In September 1950, the biggest cost of living increase for program recipients occurred. The Social Security Amendments of 1950 made a cost-of-living adjustment to monthly payouts. This historic and completely arbitrary COLA will never be dethroned by hyperinflation.
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The prospect of a historically high COLA is exciting for millions of Social Security recipients. Benefit hikes should be higher in 2023 on a nominal dollar basis.
Not all is what it looks like.
If Social Security beneficiaries are ready to receive a historically high boost to their monthly payouts, it also means they're dealing with high inflation. This suggests that a large portion of the increase to Social Security checks will be spent on shelter, food, transportation, and medical care.
The inflation that senior citizens are dealing with has not been accounted for by Social Security. The purchasing power of Social Security income has fallen by 40% in the last 15 years according to a report. $100 in Social Security income in 2000 will only allow you to purchase $60 worth of the same goods and services today.
The issue with the CPI-W is that it is focused on the spending habits of wage earner and clerical workers. These are people who aren't getting a Social Security benefit. They spend their money in a different way than senior citizens. Core expenditures for seniors, such as medical care and housing, are not included in the inflation rate. Education, apparel, and entertainment have higher weights.
Neither major party has been willing to find common ground with their opponent despite the fact that both parties agree that the inflation that Social Security's seniors are facing is not doing a good job of measuring. Social Security beneficiaries are doomed to lose purchasing power over time even if the COLA is strong in the future.
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