If you receive Social Security benefits, you've undoubtedly heard that a big raise is on the way. The Social Security Administration (SSA) expects to announce just how much that raise will be in mid-October.
Some predicted earlier this year that the Social Security cost-of-living adjustment (COLA) could be close to 11%. That big of a boost probably isn't going to happen. So what should you expect? Here's the highest your Social Security increase is likely to be.
The COLA calculation
The Social Security COLA is an adjustment intended to protect benefits from being eroded by inflation. As you might expect, SSA uses inflation rates to determine what the COLA will be.
However, the agency doesn't use the inflation rate that's mentioned most frequently on the news -- the Consumer Price Index for All Urban Consumers (CPI-U). Instead, SSA relies on another inflation metric called the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
The Bureau of Labor Statistics (BLS) provides updated numbers for the CPI-W on a monthly basis. SSA uses only the data from the third quarter of the current year and the previous year to calculate the COLA for the next year.
Specifically, the agency compares the average CPI-W in Q3 of the current year to the average in Q3 of the previous year. Whatever the increase is (if any), that's what the COLA for the next year will be.
We already know what the CPI-W average for 2021 was. And we already know what the CPI-W numbers for the first two months of the third quarter of 2022 are. The only unknown factor in calculating next year's COLA is the CPI-W level for September. BLS is scheduled to announce the number on Oct. 13, 2022.
The highest COLA since Social Security began giving automatic annual benefit adjustments was 14.3% in 1980. It's theoretically possible that September inflation levels could skyrocket so much that your increase for next year tops that amount. However, we're not focusing on what's possible; our goal is to determine what's probable.
So how can we get a feel for what the highest your Social Security increase for 2023 is likely to be? One approach is to assume that the CPI-W will increase in September at the same rate as its greatest one-month increase.
We don't have to look back very far. The biggest one-month increase in the CPI-W since Social Security began calculating COLAs each year was 1.56%. And it happened in June 2022.
If we plug a 1.56% jump in for the September CPI-W, your Social Security increase for 2023 would be (drum roll, please)... 9.6%. Based on history, that's the highest your COLA will likely be.
You can probably kiss the 11% Social Security increase predicted by some goodbye. But should you bank on a 9.6% COLA for next year? No.
It's important to keep in mind that the CPI-W has actually trended downward slightly so far in Q3 instead of rising. If the inflation metric used by SSA continues to decline at the same rate as the past two months, your COLA for 2023 will be 8.7%.
Realistically, your Social Security increase will probably be somewhere a little under 9% based on how things look today. It could be a little over 9% if inflation picked up in September. Either way, though, a substantial raise is on the way for Social Security recipients -- almost certainly the biggest one in over 40 years.