Q: Will Your COLA Be Enough To Keep Up With Rising Prices?

A: Social Security beneficiaries will receive an 8.7% cost-of-living adjustment (COLA) in January, the highest that almost every beneficiary alive today has ever received.  This COLA comes on the heels of another record-setting COLA, the 5.9% adjustment that older Social Security beneficiaries received this year.  But many retirees report that the COLA in 2022, came nowhere near to keeping up with rapid price increases.

That is often the case due to the index used to determine the COLA which does not account for inflation experienced by older retired households.  There is also a lag time between when the COLA is announced in October, and when the COLA is received in January and the months that follow when prices may rise faster than the amount of the COLA.

Q: How much more money are we talking about for 2023? 

A: An 8.7% COLA would increase a benefit of $1,000 by $87.  ($1,000 x .087 = $87.) The average retiree benefit of $1,677 would increase by $145.90 per month to $1,822.90 before deduction of the Part B premium.  The Social Security Administration will be sending out “Your New Benefit in 2023” notices later in December.  But you can estimate it if you know your gross benefit in 2022.  This is the amount prior to deductions for Medicare Part B, any tax withholdings, and other Medicare plan premiums.  That information can be found in the Social Security Administration’s “Your New Benefit in 2022” notice, or you can check that amount online with your my Social Security account.

 Q: How much is the average Social Security check now?

A: The “average” Social Security check varies a lot depending on the type of benefit that you receive. The Social Security Administration’s data indicates that the average retiree benefit in 2022 is about $1,677.   The average widow or widower’s check is about $1,331 and the average check of disabled adults is $1,363.  But the size of your check isn’t as important as how well the COLA protects the buying power of the benefits that you received at retirement.  When the COLA fails to keep pace with the inflation experienced over time, you wind up spending more, but your benefits buy less.  Over the course of a 20-year to 30-year retirement, this can affect your standard of living, jeopardizing your ability to pay for food, prescription drugs, and even housing.

Q: Even though 8.7% is a significant increase, is it enough?

A:  As high as it is, this increase may not be enough considering the COLA often falls short of the actual inflation that retirees experience.  This could potentially be the case in 2023 — we won’t know until the inflation data starts coming in.  We do know that the 5.9% COLA clearly fell short in 2022.

The inflation adjustment is based on the percentage of increase in inflation during the third quarter (July, August, and September) compared with the average rate of increase in the third quarter a year ago.  But there is a lag time between when the COLA is calculated and announced, and when it is received.  This year, inflation was running almost 2 percentage points ahead of the 5.9% COLA that Social Security beneficiaries received in January of 2022 and inflation climbed considerably higher thereafter.  According to our calculations through October 2022, Social Security COLAs fell short on average by 50%.

For example, if your COLA boosted your benefit by $92 in January of 2022, by September, you actually needed a COLA of about $138 per month to keep up with inflation in 2022.

Q: Is there a better way to adjust for inflation?

A:  A major weakness in the way our government adjusts benefits for inflation is the “market basket” that our government is looking at when calculating the COLA.  Under current law, the consumer price index that the Social Security Administration uses to determine the COLA is the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

This index does not measure the spending patterns of retired households older than age 62.  That means it doesn’t accurately account for the percentage of income that older Americans spend on healthcare, housing, and food, three of the most important spending categories of older adults.  For example, the CPI-W assumes that consumers only spend about 7% of their budget on healthcare costs.  This tends to understate the growth in healthcare costs.  Surveys by TSCL and other researchers find that older and disabled Social Security recipients spend 14% or more of their incomes on healthcare.  Even worse, Medicare Part B premiums, which are the fastest growing cost in retirement, aren’t even measured by the CPI-W.  From 2013 to 2022, Part B premiums grew three times faster than the COLA-raised benefits.

Q: Is there a better way to measure rising prices of older and disabled adults who receive Social Security benefits?

A:  TSCL is working for legislation that would increase benefits modestly, and strengthen the annual COLA three ways, by:

  • Providing a modest boost to the benefits of all retirees, to help individuals “catch up” after the past two years of historically high rates of inflation.
  • Tying the annual COLA to a seniors’ consumer price index such as the Consumer Price Index for Elderly (CPI -E).  This index tends to show inflation growing at a modestly faster rate than the CPI-W in many years.  This has often been the case in deflationary periods when prices as measured by the CPI-W dropped below the previous year, and no COLA was payable at all.
  • Guarantee a minimum COLA of no less than 3%.