When a team wins a national championship, its fans almost immediately begin speculating about a repeat performance. There's a natural question that arises after almost any momentous occasion: Will it happen again?
Many Americans are almost certainly in store for a momentous occasion soon. The annual Social Security cost-of-living adjustment (COLA) will be announced in October. Experts predict the increase could be the highest in decades.
But are huge back-to-back Social Security increases on the way for the next two years? Here's what history shows.
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COLA background
The Social Security program was implemented in 1935. However, COLAs haven't been around nearly as long. Prior to 1975, the U.S. Congress decided the amount of any annual benefit increases for Social Security.
The purpose of COLAs is to protect Social Security benefits from being eroded by inflation. Therefore, the amount of each annual increase depends on how much inflation there is.
The Social Security Administration (SSA) calculates the annual COLA by determining the increase between the average of the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) over the third quarter of the current year and the average of the metric for the same quarter in the previous year. If the CPI-W average is the same or lower in Q3 of the current year compared to the previous year, Social Security beneficiaries won't receive an increase in benefits.
A mixed bag
So what do the past Social Security increases tell us about the possibility of huge back-to-back COLAs in 2023 and 2024? It's a mixed bag.
Data source: Social Security Administration. Chart by author.
In the entire 46-year history of automatic COLAs, there have only been 11 years where the increase was 5% or greater. Seven of these 11 years were followed by another year with a COLA of at least 5%. With many projecting a large Social Security increase in 2022, the total could soon rise to eight.
However, it's important to note that all but three of these big COLAs occurred during the eight consecutive years beginning in 1975. Since 1982, three out of four Social Security increases of 5% or more were followed by a lower COLA in the subsequent year. There was no benefit increase in 2009 after a 5.8% COLA in 2008.
Looking beyond history
The reality is that no clear pattern exists with previous big Social Security increases. But we can look beyond history to find some clues about how large this year's and next year's COLAs might be.
Inflation is currently at the highest level since the early 1980s. But there are signs that inflation could be headed lower.
Gasoline prices reached a record high in mid-June. However, gas prices have declined significantly in recent weeks. The streak of consecutive days with falling prices is the second-longest since 2005.
These lower prices will likely soon begin showing up in other areas. Transportation costs are an important driver of the prices of many products, including food, electronics, and household goods.
In July, home prices fell for the first time in three years. The 0.77% decline ranked as the biggest single-month drop since January 2011. Moody's Analytics thinks that U.S. house prices will continue to fall.
The Federal Reserve has already demonstrated its resolve to fight inflation by raising interest rates. More rate hikes that help bring inflation down could be on the way.
Two key questions
It remains to be seen exactly how high this year's COLA will be. Some predict the increase will top 10%. Others think that the COLA will be lower. A Social Security benefits increase of at least 7%, though, seems likely.
A second key unanswered question is how much and how quickly inflation will decline with fuel and housing prices falling and the Federal Reserve ready to boost interest rates even more. The last time inflation was as high as it is now, aggressive moves by the Fed brought the inflation rate below 5% in less than 12 months. So if history repeats itself, there probably won't be two huge back-to-back Social Security increases on the way.
