Social Security Recipients: Be Careful What You Wish For on Oct. 13

This has been a painful year for seniors living on a fixed income, as the U.S. economy is experiencing the highest inflation since the early 1980s. Wages have gone up among the working population, but for retirees, the last 12 months have likely been a difficult experience.

That's why so many retirees have circled Oct. 13 on their calendars. That's when September inflation data will come out, the final data point in determining next year's Social Security cost-of-living adjustment (COLA). In fact, last year, the Social Security Administration announced the 2022 COLA the same day as the September 2021 CPI report.

Seniors may be looking forward to as large an increase as possible; however, if you're one of them, you should be careful for what you wish for.

Image source: Getty Images.

How COLA is calculated

The COLA for the upcoming year is based on this year's July, August, and September Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

The CPI-W is usually close to the Consumer Price Index for all Urban Consumers (CPI-U), which is the headline CPI that usually gets reported in the media. But, there are some minor differences. According to the Bureau of Labor Statistics, the CPI-W is slightly more skewed toward prices for food, transportation, and clothing, with slightly less weighting on housing, medical care, and recreation.

The “good news” for seniors is that the CPI-W has actually come in higher than headline CPI-U in both July and August, at 9.1% and 8.7%, respectively, versus 8.5% and 8.3% for the CPI-U. While it may be cold comfort to those struggling with higher prices, this means seniors will get an even bigger raise relative to the inflation the overall population is experiencing.

A big inflation number is coming on Oct. 13

Since the COLA for 2023 will be determined partly by the September CPI-W, seniors may be hoping for a hot inflation print on Oct. 13, which would lead to a bigger Social Security raise next year.

However, they should probably be hoping for the opposite. This is because since the COLA is tied to cost-of-living increases, seniors aren't meant to “profit” off the raise. If inflation runs high, the COLA will be high. If inflation runs lower, the COLA will be lower. It's really a zero-sum game.

Of course, each individual is experiencing different rates of inflation, depending on whether you rent or own a home, what state you live in, or if you travel and eat out frequently or not.

But be careful what you wish for

While inflation and the COLA will be a “wash” no matter what the inflation print, persistently high inflation is why financial markets have been in such turmoil this year. In fact, 2022 has been a rare year in which both stocks and bonds have gone down significantly in value simultaneously. If you're a senior, you likely own some of both.

In many prior periods, bonds have acted somewhat as a hedge against stock market declines. That's because when a recession hits, the earnings of stocks go down, but interest rates typically fall as well, as investors price in lower inflation due to lower demand. Investors then tend to buy “safe haven” assets like U.S. Treasuries, driving up prices. In recessions, the Federal Reserve also typically cuts interest rates to try and get the economy going again.

When interest rates go down, bonds that pay out a fixed coupon typically rise in value to reflect the new lower-rate regime — that is, as long as those bonds don't have default risk. But seniors are usually (or should be) invested in Treasuries or high-quality, investment-grade corporate bonds with little default risk.

However, in 2022, persistent inflation has led to rising interest rates across the board, which has hurt both bonds and stocks. Bond prices have fallen as yields have risen to reflect the new, higher inflation, and stocks have come down as their P/E ratios have compressed.

Thus, inflation has been a big problem for virtually all financial assets. Should inflation stay high, yes, your COLA adjustment may rise a bit, but in all likelihood, your stocks and bonds will fall in value too. And the more persistent inflation is, the more the Federal Reserve may have to raise interest rates, potentially forcing a recession. That wouldn't be good for anyone and could lead to further market declines.

Lower is better

While some seniors may be wishing for another hot inflation print on Oct. 13 to collect a larger 2023 COLA, the problems associated with high inflation would likely outweigh the benefits — even for Social Security beneficiaries.

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