In 2023, after a lot of waiting and anticipation, Social Security retirees will see the largest increase in their benefits in 41 years.
The Social Security Administration (SSA) announced last year that average benefits will increase by 8.7% thanks to the program's annual cost-of-living adjustment (COLA), which is intended to make sure retirees don't lose purchasing power due to inflation.
With the average Social Security check for retirees at about $1,632 in November, that means monthly benefit checks will rise by roughly $142 per month or more than $1,700 annually. Still, higher prices across the board have put retirees under pressure. Will this year's big raise be enough to mitigate all of the inflation? Let's take a look.
The COLA has its limits
The way the SSA calculates the COLA is by looking at data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which tracks the prices on a market basket of consumer goods and services.
Image source: Getty Images.
The SSA looks at what the CPI-W is during the third quarter of the year, which is the months of July, August, and September. Then it takes the average index number for those three months and compares it to the same number for the same time period in the prior year. The percentage difference between the two numbers represents the following year's COLA, although a COLA can never be negative.
What this first tells us is that the COLA is really based on inflation, so it is increasing benefits to keep pace with how much the prices of consumer goods and services essentially just rose, as reflected by the CPI-W.
But some argue that the CPI-W does not do a good job of reflecting what retirees, typically older citizens over the age of 62, are really spending their money on. For instance, while the CPI-W does factor in housing and medical care costs, the population covered by the CPI-W tends to spend less on these items as a group than most elderly people claiming Social Security.
Benefits have lost purchasing power
The non-partisan Senior Citizens League (SCL) has actually conducted studies on how COLAs have kept up with inflation. In their latest report, the SCL found that Social Security benefits have lost 40% of their purchasing power since 2000.
The SCL study found that COLAs since 2000 have increased Social Security benefits by 64%. However, standard senior expenses are up by 130% as of March 2022. Some of these rising expenses (since 2000) include:
- Home heating: 348%
- Out-of-pocket prescription drug costs: 285%
- Medicare Part B premiums: 274%
- Gasoline: 231%
- Homeowner's insurance: 163%
- A pound of bacon: 162%
It's for this very reason that many lawmakers and experts believe the SSA should calculate benefits by using the Consumer Price Index for Americans 62 years of age and older (CPI-E) when calculating annual expenses. These better reflect what most retirees are spending their money on.
The SCL also believes that lawmakers should pass legislation providing a "modest boost" to monthly benefits to make up for years when there was either no COLA or a very small COLA. The SCL would like to see a minimum COLA of 3% going forward.
The verdict
Based on the information above, I think it's safe to say that the 8.7% COLA in 2023, while certainly helpful, is not going to be enough to make up for the lost purchasing power over the years.
There are certainly plenty of ways to potentially address this, but with the trust fund that funds Social Security benefits expected to be depleted by 2035, retirees are looking at a significant cut to scheduled benefits as is if Congress doesn't act.
Something will likely need to be done to shore up the program before lost purchasing power and higher benefits can really be addressed. Unfortunately, this is likely to be an ongoing problem for the time being.
