Senior-citizen advocacy group The Senior Citizens League (TSCL) has estimated that Social Security benefits could increase by 8.9% in January of next year. On the surface, that may sound cheer-worthy, but the mechanics behind the potential boost carry more bad news than good news.
TSCL published its estimate after the Bureau of Labor Statistics released its March 2022 inflation report. That report showed three primary measures of inflation rising between 8.1% and 9.4% over the past year.
Inflation, or rising prices, is the driver of Social Security cost-of-living adjustments (COLAs). The purpose of the COLA is to protect the purchasing power of retirement benefits so that seniors don't find their buying power sinking as prices increase. Unfortunately, the timing of COLA implementation can be problematic for seniors who are just getting by.
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Timing is everything
Social Security calculates COLAs from changes in the consumer price index for wage earners and clerical workers (CPI-W). Specifically, next year's COLA will be the percentage difference between this year's average third-quarter CPI-W and the prior year's average third-quarter CPI-W. The CPI-W is measured monthly, so the third-quarter average is calculated using the numbers from July, August, and September.
If the average third-quarter CPI-W goes up by more than 0.1%, Social Security beneficiaries will receive a COLA that is added to benefit checks starting in January of the next year. High inflation in 2021, for example, led to the 5.9% COLA bump that beneficiaries received at the start of 2022.
One problem with this system is the delay between when prices rise and when seniors get some relief from the COLA. Seniors wait until January to get the COLA even though higher prices are affecting their budgets and spending power now.
Next year's COLA could also be lower than TSCL's estimate of 8.9%. That estimate is based on projected CPI-W values for July, August, and September 2022 and if inflation slows, the index won't increase as much as is expected right now.
The COLA predictions TSCL makes later in the year tend to be more accurate. In May of 2021, TSCL predicted a 2022 COLA of 4.7%. In September, when the July and August CPI-W numbers were published, the TSCL updated the estimate to 6% or 6.1%. The actual COLA at the start of this year was 5.9%.
Good news, bad news
Inflation is a tricky thing for Social Security recipients. It eventually leads to higher benefit checks, but only after those beneficiaries have absorbed higher prices. An easing of inflation slows the price increases and the budget squeeze, but also shrinks the potential COLA. Certainly, lower inflation is the easier path for seniors, but getting a lower annual increase isn't exactly worth celebrating.
Seniors who are just getting by are the hardest hit by rising inflation. They may not have the flexibility in their budget to manage higher costs for several months before the next COLA hits their checks. This underscores the importance of having ample savings and a cash emergency fund to supplement Social Security.
