How big will the next Social Security increase be? The predictions that have received the most attention have speculated that the cost of living adjustment (COLA) could approach 11%. There hasn’t been such a big COLA since 1981.
But the lofty forecast did not factor in data released by the US government just days ago. And the numbers don’t lie: you can say goodbye to your 11% increase in Social Security.
Slowdown in inflation
Social Security COLAs are intended to prevent retiree benefits from being eroded by inflation. For most of the past 40 years, annual increases have been relatively low because inflation rates have been low. Social Security recipients haven’t received a raise at all in three years.
All predictions of a massive increase in Social Security for 2023 have been based on the sky-high inflation seen so far this year. It makes perfect sense for your COLA to be exceptionally good due to soaring prices. However, there are a few important details to know about how the Social Security Administration (SSA) calculates COLAs.
First, the agency only looks at the comparison of the average inflation rate during the third quarter of the current year and the same period of the previous year. Second, SSA uses the Consumer Price Index for Urban Wage and Clerical Workers (CPI-W), a measure of inflation that is a bit different from the Consumer Price Index for all urban consumers (CPI-U) which is usually mentioned in inflation reports.
The Bureau of Labor Statistics released inflation figures for the month of August on September 13, 2022. These data clearly show that inflation has moderated somewhat, mainly due to lower oil prices. essence.
The CPI-W metric used by SSA to calculate COLAs has now declined, albeit slightly, for two consecutive months. In August, the CPI-W fell to 291.629 from 292.219 in July, a decrease of 0.2%.
We’ll have to wait for the September inflation data to really know what the Social Security increase will be. Those numbers don’t come out until mid-October. However, it’s already pretty clear that an 11% COLA is highly unlikely.
I will not go into all the details of the calculations. The bottom line, however, is that CPI-W would need to rise nearly 6.3% in September from August’s level for Social Security’s COLA to be 11%.
That might not seem like a huge leap forward. But in the period since Social Security’s annual COLAs came into effect in 1975, the largest monthly increase in CPI-W has been 1.5%. This happened in May 2022.
Is it possible inflation could jump in September more than four times the biggest one-month increase in 47 years? Sure. Is it likely? No way.
We can just look around and see that fuel and house prices (two of the main drivers of inflation) are lower than they were earlier this year. Inflation is much more likely to continue falling than for a massive spike.
Kiss a big hello COLA
Based on the average for the third quarter so far, the next increase in Social Security would be around 8.9%. It would be the biggest increase for Social Security recipients in decades. Since 1975, there have only been three years with higher COLAs.
You should almost certainly say goodbye to that 11% increase in Social Security. However, you will no doubt soon be able to embrace a historically great COLA salute.
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