Social security is heading towards a boost of 8.9% in 2023, as inflation is affecting senior citizens now
Social security is heading towards a boost of 8.9% in 2023, as inflation is affecting senior citizens now

Social security is heading towards a boost of 8.9% in 2023, as inflation is affecting senior citizens now

Senior Citizens Advocacy Group The Senior Citizens League (TSCL) has estimated that social security benefits could increase by 8.9% in January next year. On the surface, it may sound jubilant, but the mechanics behind the potential boost bring more bad news than good news.

TSCL published its estimate after the Bureau of Labor Statistics released its March 2022 Inflation Report. This report showed three primary inflation targets, rising between 8.1% and 9.4% over the past year.

Inflation or rising prices are the driving force behind Social Security cost of living adjustments (COLAs). The purpose of COLA is to protect the purchasing power of pension benefits so that seniors do not experience that their purchasing power decreases when prices rise. Unfortunately, the timing of COLA implementation can be problematic for seniors who are just about to make it.

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Timing is everything

Social Security calculates COLAs based on changes in the Consumer Price Index for Employees and Office Workers (CPI-W). Specifically, next year’s COLA will be the percentage difference between this year’s average CPI-W for the third quarter and the previous year’s average CPI-W for the third quarter. CPI-W is measured monthly, so the third quarter average is calculated using the figures from July, August and September.

If the average CPI-W for the third quarter increases by more than 0.1%, Social Security beneficiaries will receive a COLA added to benefit checks starting in January next year. High inflation in 2021, for example, led to 5.9% COLA bump which the recipients received in early 2022.

One problem with this system is the delay between when prices rise and when seniors get some relief from COLA. Seniors wait until January to get COLA, though higher prices affect their budgets and purchasing power now.

Next year’s COLA may also be lower than TSCL’s estimate of 8.9%. That estimate is based on expected CPI-W values ​​for July, August and September 2022, and if inflation declines, the index will not rise as much as expected right now.

The COLA predictions that TSCL makes later in the year tend to be more accurate. In May 2021, TSCL predicted a 2022 COLA of 4.7%. In September, when the CPI-W figures for July and August were released, TSCL updated the estimate to 6% or 6.1%. The actual COLA at the beginning of this year was 5.9%.

Good news, bad news

Inflation is a difficult thing for social security recipients. This ultimately leads to higher benefit checks, but only after these recipients have absorbed higher prices. A relaxation of inflation slows down price increases and budgetary pressures, but also shrinks the potential COLA. Lower inflation is certainly the easiest path for seniors, but getting a lower annual increase is not exactly worth celebrating.

Seniors who are just doing well are hardest hit by rising inflation. They may not have the flexibility in their budget to handle 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 in addition to social security.

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