Here's the Ugly Secret About the Huge Social Security Increase on the Way | The Motley Fool

Here’s the Ugly Secret About the Huge Social Security Increase on the Way | The Motley Fool

Positive things sometimes come with an asterisk. Digging into the details can reveal that what you thought was great wasn’t as good as it seemed.

Unfortunately, there’s probably going to be such an asterisk with the Social Security cost-of-living adjustment (COLA) for 2023. Yes, the increase will be huge. But there’s an ugly secret about it that many Social Security recipients don’t know.

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A slam dunk

No one knows exactly how big the next Social Security COLA will be. The Social Security Administration will announce the amount in October 2022.

However, it’s a slam dunk that the increase will be big. COLAs are established based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which measures Americans’ cost of living. With inflation hitting 40-year highs, the CPI-W is rising significantly.

The 2022 Trustees Report for Social Security projected that benefits would increase by 3.8%. But Stephen Goss, the chief actuary of the Social Security Administration, said on June 2 that estimate could be far too low, adding, “Looking at the CPI-W trends we’re seeing so far this year, it’s likely we’ll have a COLA closer to 8% than to 3.8%.”

But even Goss’s estimate could be too low. The Committee for a Responsible Federal Budget projects that the 2023 COLA could be as high as 10.8%. If so, the average person receiving Social Security retirement benefits could rake in an extra $2,162 next year.

The ugly secret

An increase of somewhere between 8% and 10.8% seems quite possible. Even if the COLA is slightly below this range, it would mark the biggest adjustment in four decades. However, there’s one big problem of which many Social Security recipients might not be aware: Social Security COLAs aren’t keeping up with real inflation.

Seniors have lost 40% of their buying power over the past 22 years, according to a study conducted by The Senior Citizens League. While there have been COLAs in all but three years during the period, they haven’t kept pace with inflation.

You might wonder how this could be the case, since COLAs are specifically calculated based on CPI-W increases. But CPI-W excludes cost increases in Medicare premiums and out-of-pocket healthcare spending — things that can hit retirees hard.

When the program first implemented automatic annual COLAs back in 1975, the CPI-W was the only Consumer Price Index published by the federal government. Now, a research price index called the CPI-E specifically targets price increases impacting seniors.

There have been a lot of discussions over the years about revising how Social Security COLAs are calculated to use the CPI-E instead of the CPI-W. No changes have been made so far, though.

One possible winning scenario

Are Social Security recipients simply out of luck no matter what happens? Not necessarily. There’s at least one possible scenario where seniors could win.

The next Social Security COLA will be calculated by comparing the average CPI-W for the third quarter of 2022 to the average for the third quarter of 2021. If there’s an increase (which there will almost certainly be), it will be rounded to the nearest tenth of 1% to determine the COLA for 2023. 

Let’s suppose that Social Security’s actuaries do their number crunching and come up with a COLA of 10%. Seniors would then receive a 10% increase in their Social Security checks beginning in January 2023.

Now, let’s suppose that consumer prices plunge in the fourth quarter of this year. Maybe the Federal Reserve’s interest rate hikes have the desired effect and get inflation under control remarkably fast. Perhaps COVID-related supply chain issues will be largely resolved by the end of 2022. A resolution to the Russia-Ukraine conflict could slash fuel prices.

In this hypothetical scenario, seniors could get the benefit of a big COLA increase but actually see lower prices for many goods and services next year. This would without question be great news. But is it likely? Unfortunately, no. There’s nearly always an asterisk.


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