The historic 2023 Social Security COLA comes with a silver lining



The wait for the more than 65 million Social Security beneficiaries, the majority of whom are elderly people, is almost over. In just 10 days, the U.S. Bureau of Labor Statistics will release key inflation data that will serve as the final puzzle piece for calculating Social Security’s Cost of Living Adjustment (COLA) for the year. coming.

Since polls and studies have shown how vital Social Security income is to the financial well-being of most retirees, knowing how much payouts will increase in 2023 is of utmost importance to Americans. older.

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Social Security’s Cost of Living Adjustment (COLA) is the biggest announcement of the year

The simplest way to think of the Social Security COLA is as a mechanism to account for the inflation — that is, the rising prices of goods and services — that program recipients face. . If retirees rely on their Social Security income to purchase a certain amount of goods and services, and those goods and services increase in price, ideally we should see benefits increase by an additional amount. COLA is simply the “increase” passed on most years to keep Social Security payments on par with inflationary increases.

Since 1975, the Consumer Price Index for Urban Wage and Clerical Workers (CPI-W) has been the inflationary tool used to determine the program’s COLA. It is an index with more than half a dozen major expense categories and a multitude of sub-categories, each with its own respective percentage weighting. These weights allow the CPI-W to be expressed as a single number, which facilitates month-to-month or year-to-year comparisons to determine whether inflation or deflation (lower prices) has occurred.

The Social Security COLA calculation involves taking the average CPI-W reading for the third quarter (Q3) of the current year (July-September) and comparing it to the average CPI-W reading. W of the previous year’s Q3. If the current year’s figure is higher, it means that inflation has occurred and the beneficiaries are receiving an “increase”. The year-over-year percentage increase in the third quarter average CPI-W, rounded to the nearest tenth of a percent, is what determines the size of any “increase” that beneficiaries social security will receive.

United States Inflation Rate Chart

Historically high inflation should lead to a sharp increase in social security checks in 2023 Inflation rate in the United States given by Y-Charts.

Program’s ‘historic’ COLA could lead to disappointment

In 2023, virtually all recipients of the program are set to receive their largest increase in Social Security benefits on record. Historically high inflation is expected to push the cost-of-living adjustment to 8.7%, according to an estimate by Social Security policy analyst Mary Johnson of the Senior Citizens League (TSCL), a senior citizen advocacy group. non-partisan. A COLA of 8.7% would mark the largest year-over-year percentage increase in 41 years, as well as the largest nominal dollar increase in the program’s history.

If we assume Johnson’s predictions are correct, the average retired worker is looking at a $146/month increase in their Social Security check next year. Meanwhile, the average payout for disabled workers and survivors is expected to increase by $119/month and $116/month, respectively, in 2023.

However, the Social Security COLA is usually not all it’s made out to be. For example, rapidly rising spending on food, housing and energy is expected to eat into a significant portion of next year’s benefit increase. The reason the 2023 COLA will be “historic” is that consumers have faced historically high inflation.

Additionally, analysis by TSCL in May found that the purchasing power of a Social Security dollar has declined by 40% since 2000. The CPI-W simply did not do well in accounting for inflation that matters to seniors. . Because the CPI-W tracks the spending habits of “urban salaried and office workers,” key expenses, such as medical care and housing, are underweighted. This is what has led to the chronic loss of purchasing power over the past 22 years.

A nurse takes care of a patient in a residence for the elderly.

Image source: Getty Images.

There’s a surprising silver lining to Social Security’s 2023 COLA

Although the Social Security COLA has resulted in a number of disappointments over the years, the upcoming “increase” for 2023 actually comes with a silver lining.

Last week, the Centers for Medicare and Medicaid Services (CMS) released the 2023 premiums, deductibles, and coinsurance amounts for Medicare Part A (inpatient care), Part B (outpatient services), and Part D (prescription drugs) programs. . Since most Social Security retirees are enrolled in Medicare, they’re used to having their Part B premiums automatically deducted from their monthly retiree benefit.

Over the past quarter century, you would only need one hand, and not even all of the fingers on that hand, to count the number of times Medicare Part B premiums have fallen year over year. the other. In fact, 2022 marked one of the largest year-over-year percentage increases in Part B premiums in history (14.5%). But there is a respite coming in 2023.

According to CMS, Medicare Part B premiums will drop about 3% to $164.90/month in 2023 from $170.10/month in 2022. The annual deductible for Part B beneficiaries will also drop by $7. , rising from $233 in 2022 to $226 in the coming year. Note that these Part B premium reductions also apply to high earners (greater than $97,000 modified adjusted gross income) who face an additional premium.

Part B’s huge uptick in 2022 was due, in part, to coverage uncertainties biogenicAduhelm, the expensive drug against Alzheimer’s disease. But thanks to lower-than-expected spending on Aduhelm and a significant increase in the Supplementary Medical Insurance Trust Fund, these excess reserves can be used to reduce Part B premiums next year.

In other words, the silver lining for tens of millions of elderly beneficiaries is that they can actually keep some more of their COLA in 2023 after all, rather than losing it to the game’s premium increases. B and/or inflation.

However, don’t be fooled into thinking that the beneficiaries are “moving on”. Regardless of the level of Social Security’s cost-of-living adjustment in 2023 or in years to come, it will be nearly impossible to offset a 40% loss in purchasing power since 2000.

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