More than 48 million Americans received a retirement benefit from Social Security in July. The vast majority of these recipients – 89 percent, according to an April poll by national pollster Gallup – rely on the program to make ends meet during retirement.
It’s a similar story for America’s huge workforce. When Gallup surveyed the non-retired earlier this year, a whopping 84% expected their Social Security benefit to be a “main” or “minor” source of income during their golden years.
The point is that Social Security is, or will be, an indispensable source of income for most Americans. This is what makes the announcement of the program’s annual cost of living (COLA) adjustment during the second week of October so important. This year’s announcement is slated for release on October 13 at 8:30 am ET.
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What is the Cost of Living Adjustment (COLA) of Social Security?
Social Security COLA allows the program to recognize changes in the price of goods and services over time (i.e. inflation). If the price of food, shelter, medical care, and a range of other important goods and services rises, ideally we should see social security checks increase hand in hand to ensure that beneficiaries do not lose purchasing power over time. COLA is the “increase” that is passed on to the more than 65 million beneficiaries of the program that explains the inflation. You will notice that “raise” is in quotes to reflect that it is not a typical raise offered by an employer to help people overcome inflation.
Before 1975, there were no rhymes or reasons for when the cost of living adjustments had passed. Rather, arbitrarily assigned special sessions of Congress increase at random intervals. But since 1975, the consumer price index for urban wage earners and office workers (CPI-W) has served as the inflationary link of social security.
The CPI-W is a predefined basket of goods and services with eight major spending categories and dozens and dozens of sub-categories, each of which has its own respective percentage weighting. These weights allow the CPI-W to be expressed as a single clear and orderly figure, which can be easily compared with the previous year period to determine whether inflation or deflation (falling prices) has occurred.
Determining the Social Security COLA involves using only the third quarter (July through September) CPI-W readings. While the other nine months of the year can help identify price trends, they won’t affect Social Security COLA.
To calculate the Social Security cost of living adjustment for the following year, compare the third quarter (Q3) average CPI-W reading of the current year with the third quarter CPI-W average reading of the previous year. . If the current year is higher, inflation has occurred and the beneficiaries are in line for an “increase”. The amount of the increase is the year-over-year percentage difference in the average CPI-W readings for the third quarter, rounded to the nearest tenth of a percent.
Say goodbye to any hope of a double-digit COLA in 2023
In 2023, beneficiaries can count on receiving the largest increase in social security in the past four decades. On the wall it said that this would be the case when the US inflation rate in June hit 9.1%, also a high in more than four decades.
However, the size of next year’s COLA has been shrinking for more than a month. Initially, Mary Johnson, a social security policy analyst at The Senior Citizens League (TSCL), a non-partisan senior advocacy group, estimated that COLA could reach 11.4% in 2023 if inflation data continues to rise. exceed expectations. The Bureau of Labor Statistics (BLS) July inflation report, which showed a drop in the main inflation rate, quickly put this high-end estimate to rest.
Following the release of the BLS’s August inflation data last week, Johnson’s upcoming high-end estimate of a 10.1% COLA can also be hailed. Although Wall Street was far from satisfied with the inflation rate of 8.3% in August, it continued to experience a two-month drop in the main figure.
As of Johnson’s Sept. 14 update, Social Security’s COLA now appears to be on track for an estimated 8.7% increase in 2023. For the average retired worker, that is expected to bring home $ 1,683 per month by December 2022, an 8.7% “raise” would equate to an additional $ 146 per month in 2023, or just over $ 1,750 more for the full year.
Retired workers are facing a potential double whammy
Apparently, the largest nominal dollar increase ever recorded on social security checks can be considered positive. But for the more than 48 million retirees currently receiving benefits, Social Security’s COLA 2023 is just another in a long line of disappointments.
To begin with, it is important to recognize that a large adjustment in the cost of living is a reflection of historically high inflation. Seniors won’t just pocket an estimated 8.7% increase in their monthly winnings and will live great. Instead, the rapidly rising costs of food, housing and medical care – including projected increases in monthly Medicare Part B premiums – are far more likely to devour most or all of next year’s COLA.
Perhaps the biggest problem facing retired workers is the persistent loss of purchasing power for social security income. Since early 2000, seniors have seen the one-dollar purchasing power of Social Security drop by 40 percent, according to a May report by TSCL.
The culprit of this continuing loss of purchasing power? The CPI-W.
As the official name of the CPI-W suggests, it tracks the spending habits of “urban wage earners and office workers”. These are usually working-age Americans who are not receiving social security benefits. More importantly, they spend their money very differently than seniors who make up the bulk of the more than 65 million social security recipients. The end result is that key expenses, such as housing and medical expenses, are underweighted in the COLA calculation, while more emphasis is placed on less important costs, such as clothing and education.
Without a clear path to solving the Social Security COLA dilemma, retired workers can expect the purchasing power of their Social Security income to continue to decline over time.
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