For better or worse, Social Security is our nation's most vital social program. It's responsible for pulling 22.5 million people out of poverty every year and is expected to play a vital role in helping nonretirees make ends meet during their golden years. A recent survey from national pollster Gallup found that 84% of nonretirees plan to lean on Social Security as a "major" or "minor" source of income when retired.
Considering how important the program is to the financial well-being of tens of millions of currently retired Americans, there's perhaps no announcement more universally awaited than Social Security's annual cost-of-living adjustment (COLA).
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Understanding Social Security's cost-of-living adjustment
Social Security's COLA is a "raise," but not in the true sense of the word. It's an annual benefit increase that's passed along most years and is designed to help beneficiaries keep up with inflation (i.e., the rising cost of goods and services they're purchasing). This is why "raise" is in quotation marks, because COLA isn't meant to help beneficiaries get ahead.
Since 1975, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) has served as Social Security's inflationary tether. The CPI-W has eight major spending categories and dozens upon dozens of subcategories, each with their own respective weightings. This allows for a concise CPI-W reading that can be easily compared to the previous year to determine if inflation or deflation is present.
One of the more interesting aspects of Social Security's COLA is that only a small portion of the year determines how much of a "raise" program beneficiaries will receive. Only readings from the third quarter (July through September) influence Social Security's COLA for the upcoming year. This means we're just about to enter the months that matter for America's top social program.
Social Security checks are set for a historic increase in 2023
Even though the other nine months won't factor into Social Security's COLA calculation, they can still offer big clues as to what to expect in the upcoming year. When it comes to 2023, the tea leaves imply a historic monthly payout increase.
According to Mary Johnson, a Social Security policy analyst at The Senior Citizens League (TSCL), a nonpartisan senior advocacy group, the annual COLA for 2023 "could be around 8.6 percent." If this figure comes to fruition, it would be the largest year-over-year percentage increase for monthly benefits in 41 years, and the biggest nominal dollar payout increase in history.
Based on the latest snapshot provided by the Social Security Administration, the nearly 47.7 million retired workers receiving a monthly benefit were taking home an average of $1,666.49 in April. By December, I estimate this monthly payout will climb to $1,683. The roughly $2/month increase in average payouts through December is a function of newly retired workers joining the benefit pool each month.
If Johnson's COLA estimate proves accurate, the average retired worker can expect their monthly benefit to climb by roughly $145 in 2023, or close to $1,740 in additional income next year. Likewise, the average disabled worker benefit and average survivor payout would rise by more than $117/month and $114/month, respectively, in the upcoming year.
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Soaring benefits won't offset Social Security's shortcomings
On the surface, an average retired worker benefit increase of $145/month would probably make seniors pretty happy. But not all is what it seems -- even with historic benefit increases seemingly on the horizon.
As noted, Social Security's COLA isn't a tool that's designed to help beneficiaries get ahead. If they're receiving a significant year-over-year increase, it's because the cost of everyday goods and services has increased by an equally jaw-dropping amount. Energy, food, and housing costs have all been rising at an alarming pace, and threaten to gobble up most or all of retired workers' COLA in 2023.
But there's an even bigger problem, and it has to do with Social Security's inflationary tether, the CPI-W.
As the full name of this inflation-measuring index implies, it tracks the spending habits of "urban wage earners and clerical workers." These are typically working-age Americans who aren't receiving a Social Security benefit, and who spend their money very differently than the seniors who comprise the bulk of program recipients.
For instance, medical care and housing expenditures account for a higher percentage of total spending for seniors than they do for working-age Americans. Conversely, education, apparel, and transportation costs are higher for working Americans than seniors. But because the CPI-W is geared toward urban wage earners and clerical workers, it underweights crucial costs for retired workers, while lifting the weightings for less-important expenditures.
Since 2000, TSCL reports that the purchasing power of Social Security income is down by 40%. An estimated 8.6% COLA in 2023 won't help retired workers make up much or any ground, relative to what they've already lost.
