You may have heard a lot lately about the huge Social Security Cost of Living Adjustment (COLA) that is on the way. Some predict the increase could be nearly 11%.
However, it’s generally a good idea to hope for the best while preparing for the worst. There are some reasons why you shouldn’t count on a COLA of almost 11%. But what is the smallest increase in your social security?
How COLA is calculated
To answer the question, it is important to first understand how COLA is calculated. Since 1975, these annual increases have been based on the consumer price index for urban wage and office workers (CPI-W). CPI-W is one of several measures used by the Department of Labor’s Bureau of Labor Statistics (BLS) to track inflation.
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In June, the BLS reported that CPI-W rose 9.8% over the previous 12 months. So does this mean that the Social Security COLA for 2023 will be at least at this level? No.
Social Security only uses CPI-W figures for the third quarter of the current year and previous years. The increase between the two numbers determines the COLA for the following year. If there is no increase, there is no COLA.
For example, in the third quarter of 2021, the CPI-W averaged 268.421. In the third quarter of 2020, the average was 253,412. The difference between the figures was 5.9%. And this increase was used to fix the COLA for 2022.
Since the third quarter of 2022 isn’t over yet, there’s no way to know for sure what the average CPI-W will be for the quarter and COLA for 2023. But some experts have said educated guesses.
Mary Johnson, Social Security and Medicare policy analyst at the Senior Citizens League, predicts COLA for next year will be at least 9.8% even if inflation eases somewhat from the June level. Johnson thinks the COLA could reach 11.4%.
But this range is higher than the projections of the Committee for a Responsible Federal Budget (CRFB). The CRFB is a nonpartisan, nonprofit organization that focuses on issues affecting US fiscal policy. When you see reports of Social Security’s COLA for 2023 as high as nearly 11%, they’re probably using the CRFB estimate of 10.8%.
This number was the upper end of the CRFB range. The lower end of the range projected by the organization was 7.3%. This may be the lowest Social Security increase to expect.
What happens if we assume that inflation in Q3 will remain at the same level as in Q2? The CPI-W in the third quarter of 2021 was 268.421. If the inflation measure for the third quarter of 2022 remains unchanged from the second quarter, it will be 288.38. This translates to a 2023 COLA of 7.4%.
On the other hand, we are seeing some signs that inflation may ease in the third quarter: fuel prices have come down somewhat in recent weeks and the housing market appears to be cooling. Perhaps COLA could be closer to 7% if these trends continue through the quarter.
Probably not enough
Social Security recipients probably wouldn’t go wrong in bracing for a COLA of around 7%. However, the real increase could certainly be higher than that – perhaps close to 11%, as some experts predict.
Unfortunately, the CPI-W does not include health insurance premiums and reimbursable health expenses. Medicare Part B premiums soared 14.5% in 2022. Regardless of what the 2023 COLA is, it probably won’t be enough to keep pace with the rising cost of living experienced by many seniors.
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