For Social Security's more than 65 million beneficiaries -- and especially its 48.1 million retired workers -- the most important day of the year is only two weeks away. On Oct. 13, 2022, at 8:30 a.m. ET, the Bureau of Labor Statistics (BLS) will announce September's inflation data, which is the last puzzle piece needed to calculate Social Security's cost-of-living adjustment (COLA) for 2023.

Since the vast majority of seniors receiving Social Security rely on this income to make ends meet during retirement, knowing how much they'll be paid on a monthly basis is important.

A person counting an assortment of fanned cash bills in their hands.

Image source: Getty Images.

How is Social Security's cost-of-living adjustment (COLA) determined?

The easiest way to think of the COLA is the "raise" passed along most years to account for the rising price of goods and services (more commonly known as inflation). In order for our nation's retired workers to maintain the same cost-of-living from one year to the next, Social Security checks should, ideally, rise in lockstep with inflation. The COLA is the payout increase that does just that.

However, note that I've put "raise" in quotation marks. Unlike a "raise" an employer would provide to help an employee get ahead of inflation, the COLA is strictly designed to keep pace with inflation. It's only a "raise" in nominal-dollar terms.

Calculating Social Security's cost-of-living adjustment is pretty straightforward. The average third-quarter reading (July-September) of the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) in the current year is compared to the average third-quarter reading of the CPI-W in the previous year. If the average CPI-W reading increases from one year to the next, inflation has occurred and beneficiaries are in line for a higher payout in the upcoming year. The amount of the "raise" equates to the year-over-year percentage increase in the average third-quarter CPI-W reading, rounded to the nearest tenth of a percent.

Once the September inflation data is reported by the BLS on October 13, we'll have the last data point needed to officially calculate COLA for 2023.

Here's where the 2023 COLA ranks, historically

Based on CPI-W readings from July and August, the cost-of-living adjustment for 2023 is pacing 8.8%. However, Social Security policy analyst Mary Johnson of the nonpartisan senior advocacy group The Senior Citizens League (TSCL) estimates the final COLA figure will come in at a historic 8.7%. For the average retired worker, this works out to about a $146/month increase to their Social Security check.

A $146 per-month lift for retired workers would, unquestionably, be the largest nominal-dollar increase in the history of the program. But on a percentage basis, Social Security's 2023 COLA is "historic" depending on how wide you set the lens.

Since 1975, Social Security's COLA has been tethered to the CPI-W and calculated annually. If we assume that Johnson's forecast is correct, here's how the 2023 COLA shapes up next to other years: 

Year COLA Year COLA Year  COLA
1975 8% 1991 3.7% 2007 2.3%
1976 6.4% 1992 3% 2008 5.8%
1977 5.9% 1993 2.6% 2009 0%
1978 6.5% 1994 2.8% 2010 0%
1979 9.9% 1995 2.6% 2011 3.6%
1980 14.3% 1996 2.9% 2012 1.7%
1981 11.2% 1997 2.1% 2013 1.5%
1982 7.4% 1998 1.3% 2014 1.7%
1983 3.5% 1999 2.5% 2015 0%
1984 3.5% 2000 3.5% 2016 0.3%
1985 3.1% 2001 2.6% 2017 2%
1986 1.3% 2002 1.4% 2018 2.8%
1987 4.2% 2003 2.1% 2019 1.6%
1988 4% 2004 2.7% 2020 1.3%
1989 4.7% 2005 4.1% 2021 5.9%
1990 5.4% 2006 3.3% 2022 8.7% (est.)

Data source: Social Security Administration, save for 2022, which is an estimate provided by The Senior Citizens League.

As you can see, an 8.7% COLA would be the fourth-largest "raise" in the modern era (i.e., since the CPI-W became the program's inflationary measure). It would also represent the biggest percentage increase in 41 years.

But this doesn't tell the full story. Prior to 1975, cost-of-living adjustments were passed along on an arbitrary basis by special sessions of Congress. In the 35 years between the first payout (Jan. 1, 1940) and the adoption of the CPI-W as the program's inflationary tether, 11 COLAs were passed by Congress: 

  1. October 1950: 77% COLA
  2. October 1952: 12.5%
  3. October 1954: 13%
  4. February 1959: 7%
  5. February 1965: 7%
  6. March 1968: 13%
  7. February 1970: 15%
  8. February 1971: 10%
  9. October 1972: 20%
  10. April 1974: 7%
  11. July 1974: 11%

Altogether, that's 59 cost-of-living adjustments (including the upcoming year) since the first benefit was paid in 1940. If beneficiaries are on track for an 8.7% COLA in 2023, it would mark the 12th largest in history, dating back to inception.

A visibly concerned couple examining their bills and finances while seated at the kitchen table.

Image source: Getty Images.

Seniors continue to get the short end of the stick

Superficially, the 12th largest cost-of-living adjustment is liable to leave some beneficiaries wide-eyed with glee. Unfortunately, there's more to the program's COLA than meets the eye.

For instance, the only reason next-year's benefit increase is expected to be so large is because the U.S. inflation rate hit a more than four-decade high of 9.1% in June. This suggests that beneficiaries are going to be kissing most or all of their payout boost goodbye as they cover the higher costs of shelter, medical care, food, and other expenses.

What's been even more worrisome is the persistent loss of purchasing power seniors have been dealing with since the start of the century. A May report from TSCL notes that the purchasing power of Social Security income has plunged by 40% since 2000. In other words, what $100 in Social Security income used to be able to buy can now purchase only $60 worth of those same goods and services 22 years later.

The reason for this ongoing decline in purchasing power can be traced back to the CPI-W. As its full name suggests, the CPI-W tracks the spending habits of "urban wage earners and clerical workers."

Urban and clerical workers aren't usually seniors and spend their money very differently than retired workers. The end result is that the CPI-W gives added weighting to unimportant costs, such as apparel and education, while underweighting key expenditures for seniors, like shelter and medical care. Over a 22-year stretch, this has led to a 40% loss of purchasing power on Social Security income.

No matter how historically high Social Security's cost-of-living adjustment is in 2023 or in the years to follow, it simply won't be enough to offset this persistent loss of purchasing power.