Social Security’s cost-of-living increase for 2023 would be largest in 40 years. Here’s what that means for benefits

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Retirees who are confronting higher prices due to record high inflation may get some welcome news this week when the Social Security Administration announces the cost-of-living adjustment for 2023.

The bump to benefits is slated to be announced Thursday along with new consumer price index data for the month of September.

The Senior Citizens League, a nonpartisan senior group, estimated last month that the COLA could be 8.7% next year. That would make it the highest increase in decades, topping this year’s 5.9% annual cost-of-living adjustment, which was the largest in about 40 years.

“These are just estimates,” which means the official change for 2023 could come in higher or lower, said Mary Johnson, Social Security and Medicare policy analyst at The Senior Citizens League.

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The group has been estimating how the COLA will shape up each month as new CPI data is released.

The Senior Citizens Leagues’ estimate pointed to a higher 10.5% bump to benefits next year based on June data. However, the estimate fell to 9.6% the following month and 8.7% based on most recent August data.

The estimates are based on a subset of the CPI data known as the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W. The Social Security Administration uses that measurement to determine the COLA each year.

The annual COLA applies to both Social Security and Supplemental Security Income benefits. The Social Security Administration determines the annual adjustment by calculating the percentage change in the CPI-W from the third quarter of the previous year to the third quarter of the current year.

The fact that the estimates have gone down in recent months does not necessarily coincide with a decline in inflation for seniors, according to Johnson.

“Food prices are the first place that older consumers are going to feel inflation, and those prices were up considerably in August,” Johnson said.

Beneficiaries likely to see bigger checks in 2023

Importantly, beneficiaries are poised to see more of the 2023 COLA increase in their monthly benefit checks, according to Johnson.

The reason: Medicare Part B premiums, which are typically deducted directly from benefit checks, as the standard monthly premium are set to go down by $5.20 next year to $164.90, from $170.10 in 2022.

“That will mean that beneficiaries will be able to keep pretty much all or most of their COLA increase,” Johnson said.

To be sure, some beneficiaries may also have withholdings for taxes taken from their monthly checks.

“Before deductions, people will really see basically all of their COLA in their Social Security check,” Johnson said.

As the Federal Reserve has continued to raise interest rates, that may be reflected in the September CPI data and consumer confidence.

The Fed hiked the target federal funds rate by 0.75 percentage point on Sept. 21. But the preceding interest rate increase of the same size that happened in July will likely have a bigger influence on the September data, according to Johnson.

What could happen to benefits beyond 2023

Future COLAs may not be as large as the much bigger increase anticipated for 2023.

If there is a recession, that could prompt inflation to transition to deflation, where prices go down, Johnson said.

In the midst of the Great Recession, a 5.8% COLA was announced in 2008 that went into effect in 2009. But the following two years had a 0% adjustment to benefits.

It could bring the insolvency date forward a year sooner.
Maya MacGuineas
president of the Committee for a Responsible Federal Budget

“We could possibly be in for something like that if we do go into a recession,” Johnson said.

A higher COLA in 2023 will put additional pressure on Social Security’s trust funds, which already face an estimated 13-year time horizon for the ability to pay full benefits, the Committee for a Responsible Federal Budget said in June.

A much-bigger COLA will add tens of billions of dollars to the program’s liabilities, Maya MacGuineas, president of the Committee for a Responsible Federal Budget, told at the time.

That will cost the program enough money that it could bring the insolvency date forward a year sooner,” MacGuineas said.

Sophie Tremblay

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