The numbers don’t lie: Social Security is America’s most vital social program. According to the Center on Budget and Policy Priorities, Social Security is responsible for lifting nearly 22.5 million people out of poverty every year. More importantly, it lowered the poverty rate among the elderly to 9% compared to around 38%, if social security did not exist.
Surveys have shown that the vast majority of American workers expect to depend on their income from Social Security, to varying degrees, when they retire. National pollster Gallup found that a total of 84% of non-retirees plan to rely on Social Security as either a “major” or “minor” source of income during their golden years.
Because of the importance of Social Security to the financial well-being of tens of millions of Americans, there is arguably no more important announcement than the annual Cost of Living Adjustment (COLA).
Understanding the Social Security Cost of Living Adjustment
The simplest way to think of COLA is to see the “increase” passed on to program recipients in most years. But as you’ll notice by putting “raise” in quotes, it’s not a typical raise like you’d get from an employer. COLA is a benefit increase that is uniquely designed to help recipients keep up with the inflation they face. In other words, if the price of goods and services increases, social security benefits should, ideally, increase so that recipients can always buy the same amount of goods and services.
Since 1975, the Consumer Price Index for Urban Wage and Clerical Workers (CPI-W) (thank goodness for the acronyms!) has been the inflationary nexus of Social Security. The CPI-W has eight major expense categories and a multitude of sub-categories, each with its own respective percentage weighting. These weights allow us to arrive at a single reading of CPI-W that can be compared to previous months or years to determine whether inflation (rising prices) or deflation (falling prices) has occurred.
However, only the CPI-W readings from the third quarter (July to September) are used to calculate the Social Security cost of living adjustment. While the other nine months can be helpful in identifying trends, they will not influence whether recipients will receive a “raise” in the coming year.
If the average CPI-W reading for the third quarter of the current year is higher than the average CPI-W reading for the third quarter of the previous year, Social Security recipients get an “increase “. The amount of the increase is the percentage increase in the third quarter average CPI-W reading over the previous year, rounded to the nearest tenth of a percent.
What is an extra $192 per month?
In 2023, the Social Security COLA could well go down in history. While not the largest cost-of-living adjustment in history, it has a chance of being the largest nominal dollar increase in Social Security checks by any substantial amount.
Just over two weeks ago, the Senior Citizens League (TSCL), a nonpartisan seniors advocacy group, released a report outlining their thoughts on the direction Social Security COLA might take during the of the coming year. According to TSCL Social Security policy analyst Mary Johnson, there is a wide range of outcomes. If inflation cools between July and September, the COLA could reach “only” 9.8%. However, if inflation continues to pick up during the summer months, Social Security’s COLA could hit 11.4% in 2023. For context, US inflation in June hit a high of 9, 1% in four decades.
What might an 11.4% COLA in dollars look like to the average retiree? In June 2022, the average monthly benefit for 47.9 million retired workers was $1,669.44. Typically, this average payout increases by about $2 per month, which is related to newly retired workers entering the beneficiary pool. So, by December 2022, the average monthly benefit for retired workers is expected to be around $1,683.
If inflation were to skyrocket and Social Security’s COLA reached Johnson’s high estimate of 11.4%, the average retired worker would be looking at a $192 per month increase in their Social Security check in January 2023. This would equate to a medium grip. door-to-door check of $1,875 per month.
Social Security recipients could face a double whammy in 2023
An “increase” of $192 per month would represent the largest year-over-year nominal dollar benefit increase in Social Security history. To boot, a COLA of 11.4% would be the second largest percentage increase since CPI-W became the program’s inflationary link.
But despite this potentially historic increase in monthly benefits, that’s not all for the program’s more than 65 million beneficiaries.
For starters, a high cost-of-living adjustment over several decades means recipients face rapidly rising costs. Chances are that most or all of the “increases” recipients receive in 2023 will be eaten up by the rising cost of food, housing, medical care, electricity and a host of extras. other categories of expenditure. And that’s not all.
The double whammy for program recipients is that the purchasing power of Social Security income has been declining for more than two decades. A TSCL report from earlier this year found that the purchasing power of Social Security dollars has shrunk 40% since 2000. An 11.4% cost-of-living adjustment would do little to fill the gap. the purchasing power gap that has existed for 22 years (and cash).
The reason for this persistent decline in purchasing power is that the CPI-W misrepresents the inflation that seniors face. The CPI-W is designed to track the spending habits of urban and office workers, most of whom are of working age and do not receive Social Security benefits. The end result is that the CPI-W underweights major expenses for older people, such as housing and medical care, while placing more emphasis on less important costs, such as clothing and clothing. ‘education.
There’s no easy solution to Social Security’s purchasing power dilemma, which means that even a historically high COLA in 2023 won’t help retirees much, if at all.
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