In 1972, Congress passed several amendments to the Social Security program, including one that instituted automatic cost-of-living adjustments (COLAs). That particular amendment took effect a few years later, and the first COLA was applied to Social Security benefits in 1975. Those adjustments continue to this day with the goal of preserving the purchasing power of benefits.
As inflation accelerated to a 40-year high in June, the nonprofit group The Committee for a Responsible Federal Budget said seniors could see a COLA of 10.8% in 2023. Shortly thereafter, another nonprofit, The Senior Citizens League, echoed that prediction.
However, inflation has started to cool in recent months, which has led both groups to revise their COLA forecasts downward. That is both bad and good news for seniors.
The obvious bad news
Since peaking at 9.1% in June, the rise of the Consumer Price Index for All Urban Consumers (CPI-U) — a widely used proxy for inflation — has been decelerating. It dropped to 8.5% in July and then 8.3% in August. The Social Security Administration calculates COLAs using a variation of that metric known as the Consumer Price Index for Urban Wage Earners and Clerical Workers, or the CPI-W.
The CPI-W represents a subset of the CPI-U, tracking purchases made by office workers and other employees who earn hourly wages. Like the CPI-U, increases to the CPI-W accelerated through the first half of the year, peaking at 9.8% in June. That sparked a flurry of high COLA forecasts. But the CPI-W’s surge slowed to 9.1% in July, and it slowed again to 8.7% in August, prompting a wave of downward revisions to those COLA forecasts.
The Committee for a Responsible Federal Budget recently lowered its 2023 COLA estimate to 8.6%, and The Senior Citizens League followed suit, cutting its forecast to 8.7%. To be clear, either of those numbers would still qualify as the largest COLA in 40 years, but the double-digit percentage predictions made earlier this year now appear excessive.
It’s worth noting that the Social Security Administration always uses CPI-W data from the third quarter of each year (i.e., July through September) to calculate the COLA for the following year. If the CPI-W falls further this month, even those revised COLA estimates may wind up high. For instance, if the change in the CPI-W drops to 7% in September, seniors would receive an 8.3% COLA next year. And if it drops to 6% in September, the COLA would be 7.9%.
The not-so-obvious good news
After suffering under persistently high inflation through the first eight months of 2022, seniors may be disappointed to see downward revisions to their 2023 COLA forecasts. But there is a silver lining buried in that bad news.
According to The Senior Citizens League, COLAs have actually failed to fully compensate for inflation over the long run: The buying power of Social Security benefits has fallen 40% since 2000. Several pieces of legislation aiming to address that problem currently sit before Congress, but no changes have yet been made.
In the meantime, seniors are actually better off with lower inflation (and smaller COLAs), simply because COLAs are failing to completely offset the impact of rising prices anyway. So periods of lower inflation (and smaller COLAs) should actually do a better job of preserving the buying power of benefits than massive COLAs in response to high inflation. With that in mind, seniors can view the falling COLA forecasts as good news.
The $18,984 Social Security bonus most retirees completely overlook
If you’re like most Americans, you’re a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $18,984 more… each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we’re all after. Simply click here to discover how to learn more about these strategies.
The Motley Fool has a disclosure policy.