In just 12 days -- Oct. 13, 2022, at 08:30 a.m. ET -- Social Security's more than 65 million beneficiaries will find out exactly how much their monthly benefit is slated to rise in 2023. For most of the 48.1 million retired workers receiving a Social Security check, unveiling the cost-of-living adjustment (COLA) is the most important announcement of the year.
Unfortunately, it's also an announcement with a long history of disappointment.
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Why is Social Security's cost-of-living adjustment (COLA) so important?
The best way to think about Social Security's COLA is as a way for the program to account for inflation -- i.e., the rising price of goods and services. Since so many seniors count on their Social Security income to make ends meet during retirement, it would make sense for their monthly payout to increase in lockstep with inflation so they can continue to afford the same basket of goods and services. COLA is the "raise" that takes inflation into account.
You'll note by the use of quotation marks around "raise" that this payout increase isn't a traditional raise, like the type you'd get from an employer. Since this benefit increase is designed to be on par with inflation, it'll never help recipients get ahead like a true pay raise.
For the past 47 years, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) has served as the program's inflationary tether. It has eight major spending categories and a small mountain of subcategories, each with its own respective weighting. These weightings are important as they allows the CPI-W to be expressed as a single figure that can be easily compared to the previous month or prior-year period to determine if the aggregate price of a large predetermined basket of goods and services has risen or declined.
Calculating Social Security's cost-of-living adjustment is pretty straightforward. The average CPI-W reading from the third quarter of the current year (July through September) is compared to the average CPI-W reading from Q3 of the previous year. If the value increases year-over-year, inflation has occurred, and Social Security checks will get a boost in the upcoming year. The amount of the "raise" is the year-over-year percentage increase in the average CPI-W reading, rounded to the nearest tenth of a percent.
A historic spike in the U.S. inflation rate will send Social Security benefits soaring in 2023. US Inflation Rate data by YCharts.
Social Security checks should see record "raises" in 2023 but will still disappoint
Based on the July and August CPI-W inflation data that's already been announced, beneficiaries would be looking at a hearty 8.8% COLA in 2023. But keep in mind that we don't yet have the September inflation data, which is the last puzzle piece needed to concretely calculate next year's "raise."
According to Mary Johnson, a Social Security policy analyst at nonpartisan senior advocacy group The Senior Citizens League (TSCL), the final cost-of-living adjustment is estimated to come in at 8.7%. On a percentage basis, this would mark the biggest year-over-year increase in payouts since 1982. But on a nominal-dollar basis, it's going to be the largest increase in Social Security's 87-year history.
While percentages are fun to look at, the record "raise" of 2023 really hits home when you see what it'll do to Social Security checks. Based on projected payouts by December 2022, the average retired worker should receive an extra $146 per month in January. The average disabled worker and survivor are expected to see their checks rise by $119/month and $116/month, respectively, in 2023.
However, beneficiaries may not be able to keep much of their "raise." Keep in mind that the only reason the cost-of-living adjustment is expected to hit a 41-year high is that the U.S. inflation rate has skyrocketed. With the cost of food, shelter, energy, and medical care rising well above their historical norms, a lot of this extra cash could be flowing right back out of the checking accounts and wallets of the retirees who count on Social Security to make ends meet.
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Not even a record COLA will fix this problem for retirees
But historically high inflation eating into next year's COLA isn't even the biggest problem for retirees. The elephant in the room is what's been happening to the purchasing power of Social Security income since the beginning of the century.
In May, a TSCL press release noted that, among other things, the purchasing power of Social Security dollars had declined by a whopping 40% since 2000. To put this into context, what $100 in Social Security income used to buy in 2000 can now only purchase $60 worth of those same goods and services.
How does this amount of purchasing power erosion happen in just 22 years? Look no further than the CPI-W for the answer.
Although tethering Social Security to the CPI-W in 1975 was a far better solution for passing along cost-of-living adjustments than arbitrary sessions of Congress (which was the primary method of passing along COLAs prior to 1975), the CPI-W has failed miserably to account for the rising costs seniors are contending with since 2000. That's because, as its full name alludes, it tracks the spending habits of "urban wage earners and clerical workers." These are usually working-age people who aren't receiving a Social Security benefit. More importantly, they spend their money very differently than the retirees who make up the bulk of Social Security's beneficiaries, which has resulted in key expenditures, such as shelter and medical care, being underweighted in the annual COLA calculation.
Perhaps the most frustrating aspect of the CPI-W's flaw is that lawmakers from both parties agree it's not working as intended, but they can't find common ground on how to replace it. Without compromise on Capitol Hill, the grim reality for seniors is that the purchasing power of their Social Security income will almost certainly continue to dwindle no matter how high COLA is in 2023 or the years thereafter.
