Social Security recipients are likely to see their monthly checks increase by the most since 1981.
Monthly Social Security benefits are expected to increase by 8.9 percent next year, according to a new cost-of-living adjustment (COLA) estimate released by The Senior Citizens League (TSCL), a nonprofit advocacy organisation.
Current Social Security beneficiaries must make due with a 5.9 percent COLA in 2022. Previously, the increase was a meagre 1.6 percent. An increase of 8.9 percent would be the largest since 1981 and the fourth highest since 1975, when Congress enacted automatic COLAs.
The likely massive increase in Social Security benefits is a direct response to skyrocketing inflation, which is also reaching levels not seen in over four decades. The Labor Department reported Tuesday that inflation increased to 8.5 percent in March, the highest level since December 1981. The increase was largely a result of rising gasoline, grocery, and vehicle prices.
“This year is an outlier,” says Mary Johnson, a TSCL Social Security analyst and the researcher behind the organization’s most recent COLA forecast. “This is the first time in 40 years that we have seen anything like this.”
Prior to Tuesday’s inflation report, TSCL had forecast a 7.6 percent increase in the cost of living for next year. Increased payments would provide a much-needed reprieve for the tens of millions of Americans who rely on Social Security benefits.
The Social Security Administration will announce the COLA in October, and the increased payments will begin in January 2023.
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How Social Security’s cost-of-living adjustments are calculated
While Social Security benefits are linked to inflation, they are calculated using a slightly different metric than the Labor Department’s “headline inflation rate” of 8.5 percent (CPI-U).
Rather than that, benefits are calculated using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). According to the Labor Department, this estimate paints a more accurate picture of “blue-collar” consumers, also known as low- and middle-income earners.
Due to the fact that inflation affects these groups of people differently, the CPI-W inflation rate is currently higher. Consumer prices increased 9.4 percent for that cohort of people in March, according to the Labor Department. This is the rate at which Johnson forecasted the new COLA.
The anticipated increase of 8.9 percent would benefit more than just retirees. Additionally, Social Security benefits include Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI), two critical programmes that assist disabled individuals.
Over 70 million Americans would benefit collectively from increased Social Security payments.
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Why is it necessary to increase Social Security benefits?
Regardless of its magnitude, the upcoming COLA increase may be too little, too late.
“People are attempting to live on a 5.9 percent COLA during a period of 9.4 percent inflation,” Johnson explains.
In other words, inflation is already putting a strain on people’s wallets, and the increased Social Security benefits would not begin to be paid until January 2023.
“Inflation has an effect on savings because retirees must withdraw more,” Johnson explains. “It may also have an effect if they have money invested in fixed-income securities such as bonds and certificates of deposit” (CDs).
Even so, that is a best-case scenario. Johnson shared data from a new TSCL survey that revealed approximately 45% of Social Security beneficiaries do not have any retirement savings.
Among those who did have savings, 21% reported completely depleting a retirement or savings account in the previous 12 months.
“Retirees can take a beating during a difficult economic period and may never fully recover,” Johnson says.