Important Updates About Next Year’s Social Security Cost of Living Adjustment
As we near the end of 2022, many of us feel the financial pressure inflicted by high inflation rates. To counteract inflation's effects on those receiving Social Security benefits, the Social Security Administration increases payments with an annual Cost of Living Adjustment (COLA). Let’s look at what a COLA is, how the Social Security Administration (SSA) determines it, and the ways it will affect you if you are collecting benefits.
What Is a Cost of Living Adjustment?
It’s common for employers to make wage increases to match their employees’ needs—Social Security is no different. A cost of living adjustment is an increase in pay or benefits that depends on the rising cost of goods and services. Over the past few years, the COLA has shifted up and down to best match the needs of the people who depend on it. It’s calculated by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). This data measures the monthly price change of things like food, energy, and Medicare. The Bureau of Labor Statistics tracks this index by taking the average CPI-W for July, August, and September of the previous year and the average of July, August, and September of the current year. That percentage is the COLA for the following year. Let’s look at an example: In 2021, the Social Security Administration determined the COLA for 2022 was 5.9%. If you’re the average retired worker, you would have received $1,565 monthly in 2021. With a 5.9% increase, your benefits would increase to $1,658 in 2022. While it’s only a $93 increase, in times like these, nearly $100 can make a big difference!
Why Do We Have A COLA?
The Social Security COLA has been around for 50 years, and it’s a good thing Congress introduced it. In the 1970s, rising inflation rates destroyed the purchasing power of those on fixed pensions and Social Security benefits. Retired individuals suffered because they couldn’t afford necessities like housing, food, and medical care. Thus, congress created the COLA as part of the 1972 Social Security amendments. Automatic, annual COLAs began in 1975 and continue to this day.
What Influences COLA Rates?
The annual adjustments will affect your retirement planning, and in a time of unprecedented inflation, you definitely want to understand how the SSA determines it. Long story short: it’s complicated. The equation is tricky since the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) influences the numbers. The CPI-W is a specialized index that tracks how retail prices affect urban/clerical workers over time. The CPI-W takes into consideration adjustments we make as consumers when prices rise, with factors including:
Switching brands
Not using products
Spending less overall
As prices go up, the decisions you make as a consumer also change. You may not go out to eat as often, avoid expensive outings, or delay home improvements. Because the CPI-W factors affect how consumers adjust to economic conditions, it could potentially skew COLA data. For example, if consumers spend their money more frugally, the annual adjustment might not be as high as it should be. It’s also important to note that while the CPI-W determines adjustments to everyone’s benefits, it only measures 29% of the U.S. population living in households with income derived predominantly from clerical employment or jobs with an hourly wage. Because of this, the COLA may not reflect your increased spending needs, so it's essential to plan accordingly.
How Does a Change to COLA Affect Those Collecting Social Security Benefits?
Social Security is a "fixed benefit,” and because wages ideally increase with the economy, benefits would remain unchanged without COLA. If benefits don't match inflation, many could be left behind. While most people don’t rely entirely on Social Security for retirement income, the annual COLA allows those receiving benefits to survive and thrive.
What Will COLA Look Like in 2023?
If you’re collecting Social Security benefits, you’re probably eager to learn what next year’s COLA will look like. Now, the moment you’ve been waiting (or reading) for Social Security COLA will be 8.7% in 2023, marking the highest increase in 40 years. Beneficiaries can expect to see an extra $140 or so in their monthly checks starting in January. It’s important to note that while next year’s benefits will be determined using the COLA, the equation is complicated, and your actual benefits could be slightly different. But you might wonder, “What if I’m not receiving my Social Security benefits yet?”If you have not filed for Social Security, you will still receive the annual COLA on your estimated future benefits. The Social Security Administration will automatically add COLA increases that occur after you turn 62 to your benefit rate, whether or not you are collecting benefits.
How We Can Help
Whether you’re already on Social Security or want to plan proactively, it’s much easier to stay on track with your financial milestones when you have professional help. To budget effectively for retirement, it’s important to consider every detail, including the cost of living adjustments to Social Security. If you want to work with a financial advisor who can help you create a holistic plan, reach out today.
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