Last month, close to 66 million benefit payments were doled out by the Social Security Administration. Approximately 48.5 million of these Social Security checks were directed at the retired workers for whom the program was designed to financially protect during their golden years.
According to national pollster Gallup, which has been surveying retired workers to determine their reliance on Social Security for the past two decades, roughly 9 out of 10 current retirees requires their Social Security income to cover their expenses. In other words, Social Security income, while not bountiful — the average retired worker benefit check was $1,677.52 in November 2022 — is nevertheless vital to the financial well-being of our nation’s retirees.
In 2023, a majority of these retired workers are set to enjoy their first true “raise” in a decade.
Image source: Getty Images.
Social Security’s COLA is designed to keep beneficiaries on par with the U.S. inflation rate
For the past 47 years, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) has served as Social Security’s measure of inflation. If the price for a predetermined basket of goods and services increases or decreases, the CPI-W provides an easy way to make year-over-year or month-over-month comparisons.
Determining Social Security’s annual cost-of-living adjustment (COLA), or as I like to call it, Social Security’s “raise,” is really easy. The average CPI-W reading from the third quarter (Q3) of the current year (July through September) is compared to the average CPI-W reading from Q3 in the previous year. If the current-year reading increases from the previous year, the aggregate price for the CPI-W’s predetermined basket of goods and services has risen, and Social Security’s nearly 66 million beneficiaries are in line for a benefit boost in the upcoming year. The magnitude of this “raise” is simply the year-over-year percentage increase in average Q3 CPI-W, rounded to the nearest tenth of a percent.
If you’re wondering why I keep saying “raise” with quotation marks, it’s because Social Security benefits are intended to match the rate of inflation, not to get ahead of it. That’s different from a raise you’d get from an employer that could potentially outpace the rate of inflation and put real money in your pocket — i.e., above and beyond the rate of inflation.
In just a little over a week, Social Security is set for its largest COLA in decades.
A skyrocketing U.S. inflation rate will send Social Security’s COLA to a 41-year high in 2023. US Inflation Rate data by YCharts.
Social Security’s 2023 cost-of-living adjustment will pack more punch than usual
On Oct. 13, the U.S. Bureau of Labor Statistics released September inflation data, which provided the last puzzle piece needed to calculate Social Security’s cost-of-living adjustment for 2023. The Q3 CPI-W readings from the current and previous year worked out to an 8.7% COLA for 2023.
Historically speaking, an 8.7% year-over-year increase in monthly Social Security benefits is the largest in 41 years. In nominal-dollar terms, the expected $146 per month boost to retired worker Social Security checks in 2023 will be the largest in the program’s more than eight-decade history.
But as noted, Social Security’s COLA is only designed to match the prevailing rate of inflation and not outpace it. No matter how large or small Social Security’s near-annual benefit boost, the rising cost of shelter, medical care, food, energy, and so on will effectively offset this “raise” most years.
But not in 2023.
For only the second time this century, and the first time in 11 years, Medicare Part B premiums will decline (from $170.10/month to $164.90). Medicare Part B is the portion of Medicare that covers outpatient services for eligible persons aged 65 and over.
Medicare Part B premiums soared in 2022 in anticipation of potentially high costs associated with Biogen‘s Alzheimer’s disease drug Aduhelm. However, these higher costs never came to fruition, and the Supplementary Medical Insurance Trust Fund’s reserves soared. As a result, premiums are being clawed back by roughly 3% in the new year.
Since Medicare Part B premiums are usually deducted from the benefit checks of Social Security recipients, it means beneficiaries will get to keep more of their “raise” in 2023. In short, they’re getting a real-money boost that should outpace inflation for the first time in a decade.
Image source: Getty Images.
Retirees are winning the battle but losing the war
The unfortunate aspect of this real-money lift to the pocketbooks of most Medicare-enrolled retirees is that it’s a rare event. Though retirees have seemingly won a battle for the upcoming year, they’ve been losing the proverbial war for more than two decades.
According to a report released in May by Social Security policy analyst Mary Johnson of The Senior Citizens League, the purchasing power of Social Security income has plunged 40% since 2000. In other words, what $100 in Social Security income used to be able to buy in 2000 can now purchase only $60 worth of those same goods and services. People receiving Social Security income have lost a lot of their buying power in 22 years.
The culprit for this persistent loss of purchasing power is none other than the CPI-W. Even though the vast majority of Social Security’s beneficiaries are senior citizens, the CPI-W (as its name implies) tracks the expenditures of “urban wage earners and clerical workers.” These are usually working-age folks who spend their money on different things than retired workers. As a result, important expenditures for retirees aren’t being accurately accounted for in the CPI-W, leading to cost-of-living adjustments that aren’t covering the true inflation retired workers are contending with.
Worse yet, don’t look for elected officials on Capitol Hill to tackle this problem anytime soon. Even though Republicans and Democrats fully agree that the CPI-W isn’t doing the best job of measuring annual COLAs, the two parties have offered polar-opposite solutions and have been unwilling to work with their opposition to find common ground.
In short: This loss of purchasing power has become more the norm than the exception for the program’s 48.5 million retired workers.
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.
Sean Williams has no position in any of the stocks mentioned. The Motley Fool recommends Biogen. The Motley Fool has a disclosure policy.
