Many seniors get the bulk of their income from Social Security. Some even get all of their income from the monthly benefits they receive. As such, it's easy to see why seniors can't wait to hear what their 2023 cost-of-living adjustment (COLA) will amount to.
Each year, Social Security benefits are eligible for a COLA, and that increase is based on inflation. Because inflation has been rampant in 2022, 2023's COLA could be the largest one beneficiaries have seen in decades. But that doesn't mean it still won't leave seniors cash-strapped.
A major flaw in the way COLAs are calculated
The nonpartisan Senior Citizens League recently ran some numbers and found that Social Security beneficiaries have lost 40% of their buying power since 2000. Specifically, it found that senior living costs have increased 130% over the past 22 years, yet benefits have only gone up by 64%.
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How is that possible? The problem boils down to using the wrong measure to calculate COLAs.
COLAs have long been based on the consumer price index for urban wage earners and clerical workers (CPI-W). But that index doesn't accurately measure the costs that seniors specifically face.
Take healthcare, for example. Though not a big factor in the CPI-W, healthcare is many seniors' largest expense, coming in higher than even housing. Instead, the CPI-W takes factors like gas costs into account. But while those might impact workers who commute to a job on a regular basis, retirees are likely to spend less money on gas because many don't have to drive to work every day.
That's why senior advocates have been calling for changes on the Social Security COLA front. And one common proposal is to use a different measure to calculate annual raises -- the Consumer Price Index for the Elderly (CPI-E). The logic is that since seniors face unique expenses that their younger, working counterparts may not face (or not to the same degree), it makes sense for those to be factored into COLA calculations.
Unfortunately, the CPI-E hasn't gained enough traction to date, because 2023's Social Security COLA will, in fact, be based on third-quarter data from the CPI-W. But the hope is that in time, lawmakers will recognize the merits of switching over to the CPI-E.
Gearing up for a big announcement
Seniors on Social Security can't afford to keep losing buying power. One simple but effective change could break an otherwise unhealthy cycle and put retirees in a much stronger financial position than they're in today.
But in the meantime, today's Social Security recipients will no doubt be glued to the news come October 13. That's when the Social Security Administration is expected to announce next-year's COLA, along with other key changes to the program, like the annual earnings-test limit (which determines how much income Social Security recipients can earn before impacting their benefits).
It's an announcement that many seniors are highly anticipating. But the unfortunate reality is that many Social Security beneficiaries could end up sorely disappointed by next-year's COLA -- if not initially, then in practice once they see what little extra buying power it will give them.
