This has been a whirlwind year so far, with inflation that reached 40-year highs eating away at Americans' savings. Inflation tends to hit senior citizens even harder since their budgets have little wiggle room, and healthcare costs tend to rise the older we get.
But for Social Security recipients, there could be some relief coming. Each fall, the Social Security Administration (SSA) announces its annual cost-of-living adjustment (COLA) for the following year, and 2023's hike could be one for the record books.
Expect a massive increase in monthly benefits
The COLA is an increase in the monthly benefits paid out to Social Security recipients, and in recent history it's been minimal. From 2000 to 2020, the average COLA was just over 2%.
But in 2023, Social Security beneficiaries could enjoy a massive increase, as high as 10% thanks to raging inflation.
According to the SSA, “The purpose of the COLA is to ensure that the purchasing power of Social Security and Supplemental Security Income (SSI) benefits is not eroded by inflation.”
The agency will announce the 2023 COLA this October.
How the increase is determined
The SSA calculates the benefit increase from Consumer Price Index data — specifically the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
The CPI-W is a monthly measurement of the price change in the goods and services commonly purchased by urban wage earners. The SSA looks at the previous year's third-quarter CPI-W data and compares it to the current year's third-quarter numbers to derive the percentage increase for the following year. (It's a bit of a head scratcher as to why they use only the third quarter's data.)
While we only have one month of data for the third quarter this year, its already showing a 9% increase from the CPI-W numbers last year. Many experts are predicting inflation to continue moving higher, which could push the COLA above 10%. This would be the largest increase in Social Security benefits since 1981!
Why it might not be enough
While a COLA will ultimately put more cash in the pockets of Social Security recipients, it's debatable whether the increase will be enough.
If the purpose of a benefit adjustment is to protect the older population's purchasing power, it's a bit frustrating that the CPI-W is the leading factor in determining the increase.
CPI has faced harsh criticism in recent years from some of the most respected economic minds.
Pershing Square CEO Bill Ackman recently joined the critics saying, “The inflation that households are actually experiencing is raging and well in excess of reported government statistics.”
One of the most commonly mentioned concerns is how the Bureau of Labor Statistics (BLS) captures the data. According to the BLS website, approximately two-thirds of the price data for commodities and services is collected via in-person surveys of brick-and-mortar establishments.
This makes CPI a lagging indicator of true price inflation. So while the high COLA we will likely see in 2023 is a welcomed increase, its very possible that Social Security recipients will still lose purchasing power even with the adjustment.
But with one month's worth of CPI-W data under our belts, its looking very likely that the COLA will be upward of 10%, which would be the biggest benefit increase in over 40 years. While it might not fully protect seniors' purchasing power, it will play a significant role in battling inflation for our nation's aging population.
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