For most retirees, Social Security is a necessary source of income to make ends meet. Nearly 90% of the retirees surveyed by national pollster Gallup earlier this year stated that their Social Security payout was a "major" or "minor" source of income.
Furthermore, a study from the Center on Budget and Policy Priorities (CBPP) found that 16.1 million people aged 65 and older are lifted out of poverty each year as a result of their Social Security benefit. With Social Security, the poverty rate among aged Americans is 9%. It would be closer to 38% without it, according to the CBPP.
Because of the program's undeniable importance to the financial well-being of seniors, all eyes are on the cost-of-living adjustment (COLA) for 2023, which is right around the corner.
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Set your alarm: Here's when Social Security's cost-of-living adjustment (COLA) will be announced
The easiest way to think about Social Security's COLA is as a mechanism designed to take into account the effects of inflation -- the rising price of goods and services. If it costs more to buy the same amount of goods and services from one year to the next, ideally, Social Security checks increase by the same amount so retired workers don't lose purchasing power. COLA is the "raise" passed along most years to program recipients that factors in inflation.
Prior to 1975, Social Security's cost-of-living adjustments were completely random and passed by special legislative sessions of Congress. But over the last 47 years, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) has been the program's annual inflationary tether. The CPI-W has a long list of major and minor spending categories, each of which have their own respective percentage weightings. These weightings allow the CPI-W to be expressed as a single figure, which can easily be compared to the previous month or year to determine if prices for a predetermined basket of goods and services have risen or fallen.
To calculate Social Security's COLA, the average CPI-W reading from the third quarter (Q3) of the current year (July through September) is compared to the average CPI-W reading from Q3 of the previous year. Since the September inflation data hasn't been released yet, we don't have the final puzzle piece needed to concretely calculate the cost-of-living adjustment for 2023.
But this all-important data release is just days away. On Thursday, Oct. 13, 2022, at 8:30 a.m. EDT, the U.S. Bureau of Labor Statistics (BLS) will release the September inflation data. This will allow the current-year average CPI-W reading for Q3 to be calculated and compared to the previous year's average CPI-W reading during Q3. The year-over-year percentage increase, rounded to the nearest tenth of a percent, will determine how much Social Security checks will climb in 2023.
Historically high inflation has paved the way for a record nominal-dollar boost to Social Security checks in 2023. U.S. Inflation Rate data by YCharts.
Social Security checks will enjoy a historic increase in 2023
Although no one can definitively say what Social Security's COLA will be in 2023 until the BLS releases the September inflation data later this week, the July and August inflation data provide pretty solid clues as to what to expect.
Through the first two months of the third quarter, the cost-of-living adjustment was on pace for an 8.76% increase, which would be rounded up to 8.8%. However, with crude oil and natural gas prices tapering of late, the top-line inflation reading for September is likely to fall from August. This is probably why Social Security policy analyst Mary Johnson of The Senior Citizens League (TSCL), a nonpartisan senior advocacy group, believes next year's COLA will come in at 8.7%.
Historically, an 8.7% COLA is high. Since the CPI-W became the primary measure of price changes for Social Security, an 8.7% increase would represent the fourth-largest year-over-year increase, and the biggest percentage boost since 1982. In nominal-dollar terms, it'll undoubtedly be the largest increase on record.
But percentages are one thing -- extra cash in your hand or bank account is an entirely different story. For the average retired worker, an 8.7% cost-of-living adjustment would result in a $146/month boost to their Social Security check. As for the average disabled worker and survivor ("survivor" includes all categories of survivors, such as widows/widowers, as well as parents and children), monthly benefits would be expected to rise by $119 and $116, respectively.
On a nominal-dollar basis, there's plenty of reason for retirees to cheer. But dig a bit deeper, and seniors won't be quite as happy.
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Social Security's COLA isn't all it's cracked up to be
Though more than 48 million retired workers are set to enjoy a historic payout boost, they're also contending with historic headwinds.
For example, the only reason next year's COLA is so robust is because the U.S. inflation rate hit a four-decade high in June. In other words, a significant portion of next year's monthly benefit increase is likely to be eaten up by the rising cost of food, shelter, energy, and other expenses.
It is worth noting that a silver lining of sorts could allow retirees to hang onto more of their COLA than usual. Following a mammoth 14.5% increase to Medicare Part B premiums in 2022 -- Medicare Part B covers outpatient services -- the Centers for Medicare and Medicaid Services recently announced that Part B premiums will fall about 3% in 2023. For many aged Americans, this'll be an opportunity to hang onto a bit more of next year's COLA.
But Social Security's problems go further back than you might realize. A TSCL report from May finds that the purchasing power of Social Security income has declined by 40% since 2000. Even with Medicare Part B premiums falling by 3% in 2023 and retired workers expected to receive an 8.7% payout boost come January, there's simply no way for seniors to recoup a 40% loss of purchasing power in 22 years overnight.
Ultimately, Social Security's COLA isn't all it's cracked up to be.
