Inflation has been raging for more than a year, driving up prices on everything from steak to gasoline. A major concern for retirees concerned about rising expenditures is whether their Social Security income will be able to keep up with inflation.
The quick answer is most likely. According to Boston College’s Center for Retirement Research, Social Security’s annual cost-of-living adjustment (COLA
) has kept up with inflation for the past 20 years. Despite the 5.9% COLA that took effect in January, the largest in four decades, many beneficiaries have lost purchasing power due to this year’s inflation, attributable in part to the substantial increase in Medicare Part B premiums.
Adjustments are made every year
Your benefit amount didn’t fluctuate from year to year until Congress granted a rise when the first Social Security check was delivered in 1940. However, in 1973, the Organization of Petroleum Exporting Countries (OPEC) imposed an oil embargo on the United States and other countries, causing petrol prices to skyrocket and inflation to soar. The government’s main measure of inflation, the Consumer Price Index (CPI), climbed 6.2% in 1973 and 11.1% in 1974, dramatically lowering the purchasing power of a Social Security check. As a result, Congress established automatic COLAs, which adjust Social Security benefits annually to account for inflation. In 1975, the first automatic COLA was set at 8%.
The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), a subset of the main CPI that monitors price changes in a basket of commodities, is used to calculate the COLA. The Social Security Administration (SSA) compares the average CPI-W level from July to September of the previous year to the current year’s average CPI-W level. The COLA for the next year is the difference in percentage between the two averages.
Inflation has been quite low until lately. From 2001 to 2021, COLAs averaged 2.1%. In 2009, 2010, and 2015, there was no COLA because inflation did not rise year over year. However, inflation had resurfaced by the spring of 2021, and the Social Security Administration declared a 5.9% COLA for payments paid in 2022. It was the highest COLA since a 7.4% increase in 1982. The COLA in 2023 might be even higher. “A rough estimate right now might be around 8%,” says Stephen Goss, SSA’s top actuary. “It may be a tenth of a percentage point greater or lower.”
In the short term, we’re still behind
The large COLA for 2022 didn’t cover this year’s inflation hike. In 2021, the CPI-W increased by 7.9%. Inflation has risen even faster in 2022, rising 8.9% in the 12 months ending in April, making the 5.9% Social Security COLA seem insignificant.
Some of the essential categories for older persons have climbed the highest. For example, the cost of gasoline increased by 30.3% in the 12 months ending in April, while the cost of food increased by 9.4%. Medical services, on the other hand, only increased by 3.5%.
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My name is Kevin Wirth and I have worked in the financial services industry for many years and I specialize in life insurance and retirement planning for individuals and small business owners, with a specialty in working with Federal Employees. I am also AHIP certified to work with individuals on their Medicare planning. You can contact me by e-mail or phone. I look forward to the opportunity of working with you on these most relevant areas of financial [email protected]
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Disclosure:
These articles are intended for educational purposes only. Please contact your advisors for legal, accounting or investment advice.
