For the majority of the over 49 million retired workers who receive Social Security checks each month, this payment is absolutely necessary. National pollster Gallup has conducted annual surveys over the past 20 years and found that 80% to 90% of the retired worker relies to some extent on monthly benefit checks to survive.
Given how important Golden Age Social Security income is to seniors, it’s no surprise that the Annual Cost of Living Adjustment (COLA) is the most anticipated Social Security announcement each year.
Social Security’s COLA brings more money into your pocket when prices rise
The Social Security COLA is the benefit adjustment that the beneficiary receives in most years, taking into account inflation. In other words, if the prices of goods and services increase from year to year, Social Security should ideally increase benefits by about the same amount. That way, the recipient doesn’t lose purchasing power over time.
Prior to 1975, cost-of-living adjustments were entirely arbitrary and passed in special sessions of Congress. Between January 1, 1940 and December 31, 1974, when his first retirement check was mailed, he had only 11 COLAs. In fact, the entire 1940s went by without ever adjusting payments for inflation.
Since 1975, the urban wage and clerical worker consumer price index (CPI-W) has been the financial metric for measuring annual Social Security inflation. CPI-W (thanks for the abbreviation!) has over six major spending categories and dozens of subcategories, each with its own percentage weighting. These weightings allow CPI-W to be narrowed down to a single number at the end of each month, allowing clear comparisons with the previous month or year to determine if inflation or deflation (falling prices) has occurred. can.
CPI-W is reported monthly by the U.S. Bureau of Labor Statistics (BLS), but it is the third quarter (July to September) CPI-W measurement that is important in calculating the Social Security cost of living adjustment. Value only. If this year’s 3rd quarter CPI-W average measurement is higher than the previous year’s 3rd quarter CPI-W average measurement, the price has increased and the beneficiary will have to pay his COLA in the following year. . Year-on-year declines in CPI-W, which have only occurred three times since 1975, do not change social security benefits.
The day tens of millions of Social Security recipients have been waiting for is here
The BLS releases an inflation report the second week of each month. According to the BLS release schedule, the most important day of the year for Social Security will occur on Thursday, October 12, 2023 at 8:30 a.m. ET. In other words, keep a coffee pot handy, especially if you live on the West Coast.
why october? As mentioned earlier, the third quarter measure is important to the Social Security COLA calculation. BLS will take a week to aggregate and aggregate his data from September, with minor changes, resulting in the annual release the second week of October.
Well, as you know when Announcements will be made that will affect payments to more than 66 million beneficiaries – retirees, survivors and workers with disabilities – but the question is: “The ‘raise’ will be How much will it be?” Note that the quoting of “raise” reflects that it is a benefit adjustment to match inflation, not above it.
This year, beneficiaries are experiencing a truly historic increase in their monthly benefits. The 8.7% cost-of-living adjustment they received was the largest year-on-year increase in 41 years and the largest boost to the nominal dollar in history. The average retired worker’s monthly check increased by $146.
But there’s a reason the 2023 COLA is so high: inflation. Years of dovish monetary policy by the Federal Reserve have sent prices for everything from food to fuel soaring. Based on current CPI trends, 2024 won’t be the same.
The consumer price index (CPI-U) for all urban consumers peaked at 9.1% in June 2022, but reached a more modest 4.9% in April 2023. . CPI-U is a similar metric to CPI-W. It should be noted that as of April 2023, CPI-W has increased another 4.6% over the past 12 months.
The main reason for this year-on-year decline is energy prices. With oil and natural gas prices well below their highs, everything from electricity to fuel for pumps has fallen significantly.
However, core inflation, which excludes food and energy, rose by 5.5% in April 2023 over the next 12 months. With inflation trending, Social Security Policy Analyst Mary Johnson of the Alliance for Senior Citizens (TSCL) expects COLA to hit 3.1% in 2024. For the average retired worker, next year’s monthly benefit would be expected to be a $57 “increase.”
Cost of living adjustments have disappointed beneficiaries for decades
On the bright side, more than 66 million Social Security beneficiaries have a good chance of seeing their benefits increase in 2024. On the downside, the program’s annual COLA doesn’t do a very good job of keeping pace with actual inflation. Over 20 years.
Why can’t an inflation index do exactly that job? The answer can be found in the full name of the CPI-W: Consumer Price Index. urban wage earners and office workers. Urban wage workers and clerical workers are typically working-age Americans who typically do not receive Social Security benefits.
The big problem is that CPI-W tracks the spending habits of these urban wage earners and office workers and uses this data as the basis for adjusting the program’s COLA. However, the majority of social security beneficiaries are elderly. Consumption habits differ between seniors and salaried workers and clerical workers in urban areas.
Seniors spend a larger percentage of their monthly spending on health care and shelter than the average American. However, given the focus of CPI-W, shelter and health care are given less emphasis, while less important expenditures such as education and transportation have a growing impact on COLA. is seen.
According to TSCL, the total purchasing power of social security income has plummeted by 36% between 2000 and 2023. Earlier in this century he could have purchased $100 in Social Security benefits for a retired worker, but today the same goods and goods he can only buy for $64. service.
Without bipartisan cooperation in Congress to replace CPI-W as the program’s inflation-inducing vehicle, Social Security beneficiaries will continue to lose purchasing power over time.