Social Security will be crucial to the vast majority of working Americans’ financial security in retirement.
In their later years, 84 per cent of nonretirees anticipate relying on Social Security as a “major” or “minor” source of income, according to a recent poll by the national pollster Gallup.
This is fairly consistent with the 89 per cent of seniors who are already retired and who depend to some extent on Social Security benefits to make ends meet each month.
There may not be a more anticipated announcement each year than the October cost of living adjustment, given the significance that Social Security income plays, or will play, for the majority of Americans (COLA).
What is the cost-of-living adjustment for Social Security, and how is it determined?
Consider the COLA of Social Security as the “raise” that is typically given to the program’s more than 65 million beneficiaries, without getting too technical.
You’ll see that I put the word “raise” in quotation marks to show that this yearly payout increase is intended to reflect the inflation program participants have experienced and is not intended to assist beneficiaries in “getting ahead.”
Simply put, if the cost of goods and services increases, Social Security benefits ought to rise as well.
Since 1975, the Consumer Price Index for Urban Wage Earners and Clerical Workers has served as Social Security’s inflationary anchor (CPI-W).
The CPI-W has eight main spending categories, as well as numerous smaller ones, each with a different percentage weighting.
With the help of these weightings, we can calculate the price changes for a sizable assortment of goods and services and present the results as a single, neat number that indicates whether inflation (rising prices) or deflation (falling prices) is taking place.
It’s interesting to note that only the CPI-W readings from the third quarter of the current year (July through September) and the previous year are used to calculate Social Security’s COLA.
The other nine months of the year can be useful for spotting trends, but they won’t be taken into account when determining Social Security’s cost-of-living adjustment.
The beneficiaries of the program will see an increase in their benefits in January if the average CPI-W reading from the third quarter of the current year is higher than the average CPI-W reading from the third quarter of the previous year.
The percentage increase in the average third-quarter CPI-W reading, rounded to the nearest tenth of a per cent, is used to calculate the increase’s size.
Social Security recipients should see a significant increase in their monthly benefits in the coming year.
The COLA for the program could reach 11.4 per cent in 2023 if inflation keeps rising in the third quarter, according to Mary Johnson, a Social Security policy analyst at The Senior Citizens League (TSCL), a nonpartisan senior advocacy organization.
I predict that the typical retired worker’s monthly income will be $1,683 by December 2022.
In January, an 11.4 per cent COLA would therefore result in a nearly $192 increase in monthly benefits.
In other words, by January 2023, the typical retired worker might be earning up to $1,875 per month.
Since the CPI-W became the program’s inflationary anchor in 1975, there have only been two double-digit percentage annual COLAs, to put things in perspective.
Beneficiaries received payout increases of 14.3% and 11.2 per cent in 1981 and 1982, respectively.
This means that Johnson’s peak forecast of an 11.4 per cent COLA would, if realized, be the second-largest COLA in what I would refer to as Social Security’s “modern era.”
However, if Social Security’s entire history were taken into account, an 11.4 per cent COLA wouldn’t even come close to being a record.
This is because, before 1975, Congress would hold special legislative sessions to arbitrary award cost-of-living adjustments.
Only 11 times did lawmakers vote to increase Social Security’s monthly payments between January 1, 1940, when the program’s first benefits were paid out, and 1975.
However, the vast majority of these increases involved increases in payout percentages by double digits.
For program participants, September 1950 saw the largest COLA. The Social Security Amendments of 1950 added a (drum roll) 77 per cent cost-of-living adjustment to monthly payouts after beneficiaries went the entire 1940s without an inflationary increase.
It should be clear that nothing short of hyperinflation will ever depose this legendary and wholly arbitrary COLA.
There is no reason to celebrate a historically high COLA.
For the tens of millions of Social Security beneficiaries, the possibility of a historically high COLA is probably somewhat exciting in one sense.
Benefit increases in 2023 should be higher than any year previously on a nominal-dollar basis.
Sadly, things are not always as they seem.
Social Security recipients will be dealing with historically high inflation if they are expecting to receive a historically high boost to their monthly payout.
This indicates that higher prices for housing, food, transportation, and healthcare will consume a sizeable portion of the increase in Social Security checks in 2023.
Additionally, Social Security’s inflationary tether hasn’t done a very good job of taking into account the inflation that senior citizens are dealing with.
The purchasing power of Social Security income has decreased by a nearly unfathomable 40% since 2000, according to a TSCL report released in May 2022.
It follows that what $100 in Social Security benefits could buy in 2000 can now only buy $60 of the same goods and services.
Read more:-
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The CPI-focus W’s on the spending patterns of urban wage earners and clerical workers is a problem, as implied by its official name.
Americans of working age who are not receiving Social Security benefits typically fall into this category.
More significantly, they use their money in very different ways from seniors. As a result, the CPI-W underweights core costs for seniors, such as healthcare and housing.
Conversely, less significant costs like those for clothing, entertainment, and education are given a higher weighting.
Although lawmakers are well aware of this problem and concur that the CPI-W is not a very good indicator of the inflation that Social Security retirees are facing, neither major party has been willing to give an inch and find common ground with the other.
In other words, it seems inevitable that Social Security recipients will gradually lose more purchasing power, regardless of how substantial the COLA is in the years 2023 and beyond.
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