Say goodbye to your 11.4% increase in Social Security in 2023

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For the vast majority of older Americans, Social Security income is essential. National pollster Gallup found that nearly 90% of current retirees rely on their monthly payment to make ends meet, while 84% of future retirees expect to rely on their Social Security check to varying degrees during their golden years.

Given the importance of Social Security to the financial well-being of current and future retirees, no annual announcement has higher priority than the Cost of Living Adjustment (COLA), which is due to be released during the second week of October.

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What exactly is the Social Security Cost of Living Adjustment (COLA)?

Simply put, the COLA represents the “increase” that more than 65 million Social Security recipients receive in most years to account for rising prices of goods and services (i.e., inflation). “Raise” is in quotes to convey that Social Security checks are rising to keep payments in line with inflation. It is therefore not a real increase in the traditional sense of the term.

For the past 47 years, the COLA determinant of Social Security has been the Consumer Price Index for Urban Wage and Clerical Workers (CPI-W). This is where economists blow a sign of relief for acronyms. The CPI-W has eight major expense categories and several dozen subcategories, all with their own respective percentage weightings. This allows countless categories to be summarized into a single number that can be easily compared to the previous month or year.

Social Security COLA is determined using only third trimester CPI-W readings (July to September) of the current year and the previous year. If the average CPI-W reading for the third quarter of the current year is higher than the average CPI-W reading for the third quarter of the previous year, recipients receive an increase proportional to the increase as a percentage, rounded to the nearest tenth of a percent. .

Inflation, historically high, eased somewhat in July. Inflation rate in the United States given by Y-Charts.

Time to kiss that estimated 11.4% COLA for 2023 goodbye

For the coming year, Social Security recipients — in particular, the 48 million retirees who receive a monthly check — expect their biggest “increase” in more than four decades.

Historically high inflation of 9.1% in June set the stage for what some political analysts thought would be a double-digit percentage increase in Social Security checks in 2023. Mary Johnson, political analyst at the Senior Citizens League (TSCL ), a nonpartisan seniors’ advocacy group, estimated in July that the 2023 cost-of-living adjustment could reach 11.4% if the US inflation rate continues to beat expectations.

Following the release of July inflation data from the US Bureau of Labor Statistics, one thing is clear: inflation is no longer beating analysts’ expectations. With the price of crude oil falling and the problems at fuel pumps easing (if only temporarily), the the prevailing inflation rate fell slightly in July. Doing so, all of this ensures that the high end estimate of an 11.4% COLA in 2023 is now irrelevant.

To add to this point, Social Security recipients are likely to lose much or all of their historically high COLA in 2023 due to rising costs. Over the past 12 months, the consumer price index for all urban consumers (CPI-U) – an inflationary measure similar to the CPI-W – has shown a staggering 13.1% increase for food at home, a considerable increase of 5.7% in housing expenses, and a 5.1% increase in the cost of medical care services. These are all major expenses for older Americans and a good indication that their COLA will likely be eaten up by higher costs in the coming year.

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Retired workers have had the small end of the stick for more than two decades

However, having their social security income swallowed up by rapidly rising prices is nothing new for retirees. In fact, for more than 20 years, older Americans have had the small end of America’s main social program.

In May, TSCL released a report showing that the purchasing power of Social Security dollars has dropped 40% since 2000. In other words, what $100 of Social Security income could buy in 2000 can now only buy $60 of those same goods and services. Even though global Social Security checks are increasing over time, they are nowhere near keeping pace with the inflation that older Americans face.

If you’re wondering how this is even possible, look no further than the CPI-W. As its full name suggests, it is an inflationary index that tracks the spending habits of “urban wage earners and office workers”. They are usually people of working age who do not receive social security benefits. More importantly, their spending habits tend to differ significantly from older adults. Therefore, major expenses for retired workers tend to be underweighted in the CPI-W, while less important costs, such as clothing and education, receive higher weights.

In short, the CPI-W mismeasures inflation for the majority of Social Security recipients. It doesn’t matter how big the cost of living adjustment is in 2023; the elderly are almost certain to see the purchasing power of their Social Security dollars continue to decline over time.

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