Social Security is likely to help you make ends meet during your golden years, regardless of whether you are just entering the workforce or already retired.
According to a survey by Gallup, 89% of current retirees lean on their monthly Social Security payouts as a major source of income. 85% of non-retirees expect to rely on Social Security income after they stop working.
The most-awaited announcement of the year is the Social Security cost-of-living adjustment.
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In simple terms, COLA is the raise that beneficiaries receive. I have raised in quotation marks, which is to say that this isn't a raise in the true sense of the word. The purpose of Social Security's COLA is to account for inflation that program recipients have experienced over the past year. If the prices for goods and services go up, benefits should go up as well. Social Security recipients get a nominal increase in their monthly payouts, but it is more about keeping them on par with inflation.
Special sessions of Congress approved Social Security's COLAs prior to 1975. The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) has served as the program's annual inflationary tether.
There are eight major spending categories and dozens of subcategories in the CPI-W. We can break down a large basket of goods and services into a single reading that helps us understand what is happening with prices.
The Social Security calculation for the upcoming year is based on readings from the third quarter. Social Security's COLA won't be affected by the readings from the other nine months.
You can calculate Social Security's COLA for the upcoming year once you have the third-quarter readings from the BLS. If the average Q3 CPI-W reading in the current year is higher than the average Q3 reading in the previous year, inflation has occurred and beneficiaries are getting a raise.
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Social Security has had little or no cost of living increases over the past 12 years. In the years of 2010 and 2015, there was no COLA passed along to beneficiaries due to the decline in the CPI-W. Benefit increases are not seen in multiple generations.
The Senior Citizens League, a nonpartisan senior advocacy group, suggested that the cost of living could be as high as 7.6% in 2023. If true, this would be the biggest year-over-year increase in Social Security benefits since 1982, and it would be the fifth-largest COLA since the mid-1970s.
What would a 7.6% COLA mean for a retired worker? By December, I estimate the average retired beneficiary will be taking home about $1,636 a month.
The reason for the jump in Social Security benefits is simple. In February, the BLS reported a 7.9% year-over-year increase in the Consumer Price Index for All Urban Consumers, which marked a 40-year high. The measure of inflation is called the CPI-U.
The prices for every major spending category have gone up over the last year. Shelter costs are up 4.7% from the previous year due to higher gasoline prices, new and used vehicle prices, and home prices.
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Social Security benefits will go up by $125 a month in 2023. Not all is what it seems.
Social Security's cost of living allowance is not about helping beneficiaries get ahead. It is designed to keep program recipients on par with inflation. Inflation is hitting 40-year highs and the biggest payouts in 41 years are likely to be eaten up by it.
The purchasing power of Social Security dollars has been declining since the beginning of the century. Social Security benefits have lost 32% of their buying power since 2000 according to a report. This pendulum can't be swung back in favor of beneficiaries even with a 7.6% COLA in 2023.
The real issue for Social Security is that the CPI-W doesn't do a good job of measuring inflation for most of the program's recipients.
The spending habits of urban and clerical workers are tracked by the CPI-W. The people who are typically of working age spend their money differently than the seniors who comprise the majority of Social Security's beneficiaries. Adding weight to less important spending categories, such as education, apparel, and transportation, is what the CPI-W has a tendency to do.
Lawmakers in Congress recognize that the CPI-W is doing seniors a disservice. Since America's two major political parties are approaching a fix from opposite ends of the spectrum and neither side is willing to cede an inch to find common ground, there is no fix for this dilemma on the horizon.
The purchasing power of Social Security income is expected to decline over time even if large of COLA beneficiaries are in line to receive.
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