Social Security benefits have become a key source of income for many retired Americans, and for those with disabilities.
In fact, the Social Security Administration (SSA) has found that among participants in the program, more than one-third of both men and women receive roughly half of their income from Social Security benefits. For more than 10% of both men and women in the program, Social Security benefits account for 90% of their income.
Needless to say, Social Security is a centerpiece of many Americans' financial lives, which is why those in the program should monitor changes and updates carefully. One day that Social Security recipients will want to mark on their calendars is Oct. 13. Here's why.
Inflation plays a big role in Social Security
In 1975, Congress implemented the cost-of-living adjustment (COLA) into Social Security, ensuring that when inflation went up, Social Security benefits would follow suit. After all, if consumer prices are rising at a high rate, then people receiving the same amount of Social Security would see their purchasing power decline.
As you've probably seen, inflation has been at a 40-year high all year. The Consumer Price Index, which tracks the prices on a basket of daily consumer goods and services, rose 9.1% in June on a year-over-year basis. The prices on everything from gas to rent and food have skyrocketed this year.
The SSA calculates the COLA by looking at the growth in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) in the third quarter of each year, which comprises the months of July to September. The SSA averages the CPI-W in each of these three months and then compares it to the same period of the prior year. For instance, the average monthly CPI-W in the third quarter of 2021 was 268.421. In 2020, the average monthly CPI-W was 253.412. That means the CPI-W rose by 5.9%, which is how the SSA arrived at its COLA increase for 2021.
The COLA is then applied to a retiree's primary insurance amount (PIA), which is the amount a person would get if they start collecting Social Security at their normal retirement age. The PIA is calculated through a fairly complex formula.
While we don't yet know what the CPI-W will be for August and September of this year, the CPI-W in July came in at 292.219, which is roughly 9.1% higher than in July of 2021. Inflation may have already peaked, but there really is not enough data to confirm that yet.
The non-partisan Senior Citizens League is predicting the Social Security COLA adjustment could come in at 9.6% when everything is said and done, although past reports have suggested the COLA adjustment could be as high as 10.5%. Regardless, this would mark Social Security's largest COLA adjustment since 1981.
Make sure to tune in
While it could vary by a day or two, the SSA is expected to announce this COLA adjustment on Oct. 13. Even if the adjustment was just 9.1%, that would still be 3.2 percentage points higher than last year's COLA, which was the largest COLA adjustment since at least 2009.
The average monthly Social Security check program-wide in July was $1,544.70, which means a 9.6% COLA adjustment would increase the average payment by more than $148.
Additionally, the new Social Security COLA adjustment could end up leading to more of your Social Security benefits being taxed, so there are more implications than just increased benefits. That's why Social Security participants will certainly want to tune in on Oct. 13 to hear about the new COLA adjustment right away, so they can prepare accordingly.