It's practically a slam dunk that Social Security recipients will soon receive the biggest benefits increase in a generation. Hip, hip, hooray? You might want to curb your enthusiasm.
Sure, experts are predicting a Social Security cost-of-living adjustment (COLA) in the ballpark of 8.7%. This extra money on the way will help many individuals on fixed incomes make ends meet. That's the good news. There's also some bad news, though. Sorry, your huge Social Security increase won't be enough to accomplish what it's intended to do.
Social Security was launched in 1935 with a primary goal of keeping older Americans from slipping into poverty during their retirement years. But the federal program didn't have a built-in mechanism to protect benefits from being eroded by inflation.
For decades, the only increases that Social Security recipients received came as a result of legislative action. Congress often provided double-digit percentage benefit increases. But sometimes, years would go by before adjustments were made.
Automatic annual COLAs were instituted in 1975. No longer would Social Security recipients have to wait for an act of Congress to receive a benefit increase.
The intention of the COLAs was to provide annual increases based on how much the prices of goods and services had risen. In theory, retirees and other Social Security beneficiaries would be largely insulated against the effects of inflation.
Three major flaws
But there are three major flaws with Social Security COLAs. As a result, your 2023 Social Security increase — regardless of what the amount will be — almost certainly won't be enough to offset the impact of inflation on your expenses.
First (and most problematic) is the timing of when COLAs are given. The Social Security increase for 2022 was 5.9%. That's well below the inflation level experienced throughout this year so far. Your 2023 COLA won't come in time to cover the higher costs that you've already incurred in 2022.
Second, the inflation metric used to calculate Social Security COLAs doesn't fully reflect cost increases for seniors. The Social Security Administration uses the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to determine annual increases. But the CPI-W doesn't focus on the spending patterns of older Americans, whose healthcare costs are typically much higher than those of younger Americans. Even worse, healthcare costs have risen faster than other categories.
Third, only the CPI-W levels in the third quarter of the current and previous years are used to calculate COLAs. It's possible that inflation could be significantly higher in the other quarters of the year than in the third. This could cause the annual Social Security benefit increase to be too low to address the actual impact of higher prices.
The potential for fixes
In an ideal world, Social Security COLAs would be provided more frequently to help address the first and third problems mentioned above. Practically speaking, though, the likelihood of this happening is slim to none.
But there's a greater possibility that the issue related to using the CPI-W to calculate COLAs could be addressed. President Joe Biden campaigned on a plan to change the inflation metric to the Consumer Price Index for the Elderly (CPI-E), which focuses on spending patterns for Americans ages 62 and older.
The Social Security Expansion Act introduced by Rep. Peter DeFazio, an Oregon Democrat, and Sen. Bernie Sanders, the Vermont Independent, includes a provision to calculate COLAs using the CPI-E. But the chances of the bill passing in both the House of Representatives and the Senate are low.
It's possible that legislation to bolster Social Security that includes the CPI-E could receive bipartisan support in the future. For now, though, recipients will have to settle for a COLA that's huge yet still not enough to keep their benefits from being eroded by inflation.
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