This announcement will directly affect the monthly payouts of over 65 million beneficiaries.
For most aged Americans, Social Security is imperative to their financial well-being. An April survey conducted by national pollster Gallup found that 84% of non-retirees believe Social Security will represent a “major” or “minor” source of income during their golden years. Meanwhile, 89% of existing retired workers are currently leaning on their Social Security income, to some degree, to make ends meet.
Given how important monthly Social Security checks are for seniors, there simply isn’t a more anticipated annual announcement than the cost-of-living adjustment (COLA).
What is the cost-of-living adjustment (COLA), and how is it calculated?
The easiest way to think of COLA is as the adjustment of monthly benefits to account for the rising price of goods and services. In other words, if the price for a basket of goods and services increases in value (i.e., inflation occurs), Social Security payouts should increase in lockstep to ensure that beneficiaries can still purchase those same goods and services. COLA is the “raise” passed along to Social Security’s more than 65 million beneficiaries that aims to true-up payouts to match inflation.
Prior to 1975, benefit increases were completely random and passed along by special legislative sessions of Congress. But over the past 47 years, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) has acted as Social Security’s inflationary tether and dictated whether or not benefits will increase in the upcoming year.
The CPI-W has eight major spending categories and dozens upon dozens of subcategories, all of which have their own respective percentage weightings. These weightings are what allow a gigantic basket of predetermined goods and services to be taken into account in order to determine if aggregate prices are rising or falling. Being able to whittle this down to a single CPI-W reading makes for easy month-to-month or year-to-year comparisons.
Interestingly, though, only CPI-W readings from the third quarter (July through September) determine Social Security’s COLA. While the other nine months of the year can offer clues as to where prices are headed, they won’t have any bearing on the cost-of-living adjustment. This also means we’re in the thick of the months that actually count right now.
To calculate Social Security’s COLA, the average CPI-W reading from the third quarter of the current year is compared to the average CPI-W reading from the third quarter of the previous year. If the average value increases from one year to the next, beneficiaries will receive a “raise” equal to the year-over-year percentage increase, rounded to the nearest tenth of a percent.
Mark your calendars: Oct. 13 is Social Security’s most important date of the year
During the second week of every month, the U.S. Bureau of Labor Statistics (BLS) releases the previous month’s inflation data. Although this detailed data predominantly pertains to the Consumer Price Index for All Urban Consumers (CPI-U), a similar inflationary measure to the CPI-W, the monthly BLS report also lists the monthly CPI-W reading.
According to the BLS Consumer Price Index release schedule, September’s inflation data will be announced on Oct. 13, 2022, at 8:30 a.m. ET. Since the September CPI-W reading is the last puzzle piece needed to calculate Social Security’s COLA, it means Oct. 13 is when Social Security’s 65 million-plus beneficiaries will find out how much their monthly checks will increase in 2023. That makes Oct. 13, 2022, unquestionably the most important day of the year for the Social Security program.
To save you some suspense, next year’s COLA will be historic. With the U.S. inflation rate hitting a more than four-decade high of 9.1% in June, the cost-of-living adjustment in 2023 should be the highest we’ve seen in decades. Although estimates vary wildly among policy analysts, which includes one high-end forecast of up to an 11.4% COLA, the July CPI-W reading puts the program on track to parse out an 8.9% COLA come January.
To put this into easy-to-understand terms, an 8.9% COLA would result in the average Social Security check for retired workers rising by $150 per month in 2023.
Social Security’s big day has a long history of delivering disappointment
For the 48 million retired workers currently receiving a Social Security check, a COLA of around 9% probably sounds fantastic. Unfortunately, the history surrounding Social Security’s benefit “raises” is full of disappointments.
To begin with, there’s a good chance beneficiaries will see most or all of their cost-of-living adjustment eaten up by inflation in the upcoming year. Since Social Security’s COLA is a reflection of the rising price of goods and services, a historically high COLA means seniors are dealing with significant increases in food, shelter, and medical care costs.
But the bigger issue just might be what’s been happening to the purchasing power of Social Security income since the start of the century. A May 2022 report from nonpartisan senior advocacy group The Senior Citizens League found that the purchasing power of Social Security dollars had declined 40% since 2000. In other words, what $100 in Social Security income could buy in 2000 can now only purchase $60 worth of those same goods and services.
The culprit behind this loss of purchasing power is none other than the program’s inflationary tether. The CPI-W is designed to track the spending habits of “urban wage earners and clerical workers.” These are predominantly working-age Americans that aren’t receiving a monthly Social Security check. More importantly, they spend their money very differently than the aged Americans who comprise the vast majority of Social Security recipients. The result is an underweighting of key expenditures (e.g., shelter and medical care) and a higher weighting for less-important costs, such as apparel and transportation.
With the CPI-W doing a poor job of accounting for the inflation that seniors are contending with, additional purchasing power losses should be expected, regardless of how high Social Security’s COLA is in 2023.
