Social Security and Inflation: 4 Things To Know
Many retirees live off fixed incomes that consist primarily of investments and Social Security.
Social Security: New Bill Could Give Seniors an Extra $2,400 a Year
Learn: Ways You Can Lose Your Social Security Benefits
While a fixed income can provide some sense of safety and security, inflation can devastate the value of these payments. Inflation hasn’t been much of a problem for retirees over the past few decades, but it has come roaring back with a vengeance in 2021 and 2022. With readings topping 9% in June 2022 — the highest in 40 years — retirees need a way to keep up.
Fortunately, Social Security payments are adjusted every year in response to inflation via the cost-of-living adjustment, or COLA. But have these payments been keeping up with inflation? And how is the 2023 COLA shaping up? Read on to learn more.
How Does COLA Work?
When Social Security was first conceived, there was no provision for a cost-of-living adjustment. Payments were simply fixed for life. But, in 1975, Congress authorized an 8% COLA in response to the inflation caused by the OPEC oil embargo, which had pushed up inflation by double digits.
Since then, the COLA has been determined every October in response to changes in inflation from July to September of the previous year to the current year.
However, it’s important to note that, for COLA purposes, inflation is not based off the Consumer Price Index, which is the most often-quoted measure of inflation. Rather, the Social Security Administration uses a subset of the CPI known as CPI-W, for the Consumer Price Index for Urban Wage Earners and Clerical Workers.
How Much Was COLA for 2022?
From 2001 through 2021, a span of 20 years, COLA averaged a scant 2.1%. In three of those years — 2009, 2010 and 2015 — there was no COLA at all. So, high COLAs are things that the current crop of retirees may have never seen.
Things changed on Jan. 1, 2022, when a COLA of 5.9% kicked in. This was the highest adjustment since 1982. Yet, Social Security beneficiaries weren’t exactly jumping for joy. This is because the rate of inflation was even higher than the COLA they received. The CPI was actually up 7.5% in January 2022; so, even with the bump, retirees were falling behind by about 1.6%.
What Might COLA Look Like in 2023?
Throughout 2022, inflation has only gone on to rise even higher. Readings of 8% and even 9% have been the norm, making the whole country speculate as to how high the COLA might jump in 2023.
Based on the inflation readings, some commentators feel that the COLA actually could rise double digits. On July 13, 2022, the Senior Citizens League said it’s “likely” that the COLA for 2023 will reach 10.5%. The nonpartisan Committee for a Responsible Federal Budget predicts a range of between 7.3% and 10.8%, depending on how inflation acts through September.
Whatever the actual number ends up being, the COLA is likely to see one of its biggest raises in four decades. Beneficiaries won’t have long to wait to find out the answer, as the Social Security Administration will unveil the 2023 COLA amount in October 2022.
The COLA is a great benefit for seniors, particularly those who rely on Social Security checks for the bulk of their income. Rather than having to live off the fixed payments from an investment such as a bond, the Social Security COLA helps preserve the purchasing power of a beneficiary’s payments.
But it’s important for recipients to understand that, while helpful, the COLA doesn’t always keep up with the actual cost of inflation. For example, gasoline prices are up 60% on a year-over-year basis; so, if you drive a lot, the COLA won’t be much help in defraying your expenses.
On the other hand, if you mainly stay at home or use public transportation, cook your own meals and use a small amount of energy, you may be able to live a lifestyle that avoids some of the steepest price increases brought about by inflation. In that case, the COLA may help you maintain or even improve your standard of living — particularly if it breaks the 10% level in 2023.
More From GOBankingRates