Social Security checks are on pace to rise $150 a month by 2023

Whether you realize it or not, Social Security is or likely will be an essential source of income during your retirement. It is responsible for lifting nearly 22.5 million people out of poverty every year, and nearly 90% of retired workers rely to some degree on their monthly payout to make ends meet.

With Social Security playing such a critical role in the financial well-being of current and future elderly Americans, no more announcement is expected every year than the cost of living (COLA) adjustment.

A smiling person holding up a range of cash bills.

Image source: Getty Images.

What Is Social Security’s COLA and How Does It Affect Your Monthly Payout?

Think of COLA as the “raise” the more than 65 million Social Security beneficiaries receive most years to account for inflation — the rising price of goods and services. You will notice that “increase” is in quotes to indicate that this benefit increase is all about aligning payouts to match inflation and has nothing to do with helping beneficiaries exceed prevailing inflation .

Since 1975, the consumer price index for urban wage earners and white-collar workers (CPI-W) has been the inflationary measure of Social Security. While the CPI-W has eight major spending categories, there are dozens and dozens of subcategories, each with their own respective percentage weightings. These weightings allow the CPI-W to be expressed as a single number, allowing for easy month-to-month and year-to-year comparisons when examining price changes for goods and services.

For Social Security recipients, there is no more important time than now. That’s because only third quarter (July to September) CPI-W values ​​are included in the program’s COLA calculation. While the other nine months of the year can provide useful trends, those CPI-W measurements have absolutely no effect on Social Security’s COLA in the coming year.

To calculate COLA in the coming year, the average CPI-W value of the third quarter (Q3) of the current year is compared to the average CPI-W value of Q3 of the previous year. If it has increased, beneficiaries will see their Social Security checks increase by the percentage increase over the next year, rounded to the nearest tenth of a percent.

Chart showing US inflation has risen sharply since 2020.

Historically high inflation could push Social Security’s COLA to a peak of more than four decades before 2023. US inflation data by YCharts.

Social Security checks are on track for their biggest rise in decades

Last week, on August 10, 2022, the US Bureau of Labor Statistics lifted the veil on July’s inflation data (the first meaningful month for calculating Social Security’s cost of living). For the month, the CPI-W came in at 292,219.

Bearing in mind that two more measurements are needed (August and September) before the Social Security COLA can be concretely calculated, July’s first CPI-W predicts one of the largest increases in Social Security checks in more than four decades. . The July reading of 292,219 is 8.9% (rounded up) higher than the average CPI-W reading in the third quarter of 2021 of 268,421.

What exactly would a cost of living adjustment of 8.9% look like in the benefit check of the average retired worker? As of June 2022, 47.9 million retired workers brought home an average of $1,669.44 per month. This average monthly payout usually increases by about $2 per month, indicating that newer retirees are entering the benefit pool. So by December, the average retired worker should be receiving about $1,683 per month.

Based solely on the July CPI-W value, compared to the average CPI-W value in the third quarter of 2021, a COLA of 8.9% on top of $1,683 would reduce the monthly benefits for the average retired employee with a raising a solid $149.79, or nearly $1,800 a year, by 2023. With inflation soaring to its four-decade high, I can only imagine that a $150 a month increase in Social Security checks would open arms. are welcomed.

Visibly concerned person resting their chin on their fist.

Image source: Getty Images.

A historic COLA has consequences

Unfortunately, the largest monthly Social Security increase in history is not without consequences. While more than 65 million beneficiaries will receive a healthy increase in their monthly payout by 2023, two significant headwinds are standing in their way.

For starters, a significant portion of Social Security’s cost-of-living adjustment in 2023 could be swallowed up by inflation. After all, COLA is designed to keep Social Security checks in line with the rising prices of goods and services. Significant jumps in fuel, food and shelter costs over the past year, and if we go further, could take away up to or all of the 8.9% COLA the program is currently running (until July) for the coming year. And this is not even the biggest concern.

According to a report released by the impartial senior advocacy group The Senior Citizens League, the purchasing power of Social Security income has fallen 40% since 2000. In easy-to-understand terms, what bought $100 in Social Security income in 2000 is now buying only about $60 of those same goods and services in 2022.

The problem with Social Security’s COLA is that the CPI-W doesn’t account for the inflation that seniors face. That’s a problem, because seniors make up the bulk of Social Security recipients.

As the full name of the CPI-W implies, it is an inflationary chain designed to track the spending patterns of urban wage earners and white-collar workers. These are typically working-age Americans who do not receive Social Security benefits. In short, they spend their money very differently than seniors. As a result, major expenses for retirees, such as shelter and medical care, are underweight in the CPI-W, while minor expenses, such as clothing, education and transportation, have a higher weighting.

With no solution to the Social Security COLA calculation in the offing, retired workers lose purchasing power over time.

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