The latest economic data indicating a rise in prices has prompted a warning from the nation’s largest senior citizens group: Inflation could mean record-high Social Security cost-of-living adjustments. The Senior Citizens League backed its prediction with consumer price indices. The corresponding adjustment factor is the same as the CPI. So, how high will this increase be?
A recent report by the nation’s largest nonpartisan seniors’ group suggested that inflation could mean a large increase in beneficiaries’ Social Security cost-of-living adjustments next year. If the consumer price index (CPI) increases at the same rate as inflation, a COLA of 8.6% or more would be appropriate for retirees in 2023. Historically, COLA increases have typically been about 5%.
A record-high COLA is not necessarily good news for people receiving Social Security benefits. As Mary Johnson, a policy analyst at the Senior Citizens League, points out, higher benefits can mean reduced eligibility for safety-net programs, increased tax bills, and less money in recipients’ pockets. Inflation is also not a linear indicator of income, so higher Social Security payments are not always a good thing.
Social Security cost-of-living adjustment
The average rate of inflation in the third quarter of a year is used to calculate the Social Security cost-of-living adjustment. After dividing that number by three, the resulting number will be compared to the third-quarter inflation rate for the year 2022. That would mean a record-high Social Security COLA in 2023. However, there are a few factors to watch for.
The CPI-W, a broader gauge of inflation, jumped 8.3% in April. The 5.9% increase in Social Security payments this month fell short of the rising costs of living for beneficiaries. However, economist Jason Furman, a Harvard University professor and former top economic advisor to President Barack Obama, sees some glimmer of hope. He predicts that core CPI will increase by 7.7% from a year ago.
For the fifth time in six years, the cost-of-living adjustment for Social Security beneficiaries will fall short of inflation. Last October, the Social Security Administration set the COLA for 2022 at 5.9%, a much lower number than the current increase. That means that beneficiaries will only see a $5 increase in their monthly benefits in January, not the 6.7% projected for 2010.
The SSA bases the COLA on the annual increase in the CPI-W (consumer price index), a broader measure than the CPI. Last month, the CPI-W increased 8.9%, but inflation is expected to slow this year as supply chain bottlenecks improve. The actual COLA will be set in October but may be lower than Johnson predicts. As of mid-January, only the third quarter of 2012 is available, so the COLA will be lower than the government projects.
Impact of rising prices on retirees’ budgets
As the cost-of-living increases, household budgets are squeezed. For 56 million American seniors, this puts even more strain on their already tight finances. As a result, many are forced to cut back on groceries and take short showers to save money. While this trend has moderated this summer, prices are still rising, and many retirees are living on significantly less money than they were able to save during their working years. Moreover, the cost-of-living adjustment for these older Americans may be undercut by two factors:
Inflation is forcing people to tighten their budgets. According to the U.S. Bureau of Labor Statistics, the cost of food is set to increase by 2.5 to 3.5% by 2022. Beef prices, for example, rose 43.9% in January 2022. But there’s some good news for retirees. While inflation will continue to increase, the impact of higher prices will be lessened if retirees adjust their spending patterns.