A trusted running estimate for next year’s Social Security Cost of Living Adjustment (COLA) received a big boost into double-digit territory this morning after Consumer Price Index data for June revealed inflation was at a 40-year high.
“Based on new CPI-W data through June, it appears the COLA for 2023 will be 10.5%”
The Senior Citizens League’s Mary Johnson
“Based on new CPI-W data through June, it appears the COLA for 2023 will be 10.5%,” said Mary Johnson, Social Security and Medicare policy analyst with The Senior Citizens League. That’s up significantly from her previous estimate of an 8.6% COLA increase, which had held steady the past two months based on CPI data from April and May. Another recent 2023 COLA estimate—this one from the Committee for a Responsible Federal Budget and released before the June CPI figures were announced—predicted a 10.8% increase.
“If inflation runs ‘hot’ or higher than the recent average, the COLA could be 11.4%,” Johnson added. “If inflation runs ‘cold’ or lower than the recent average, the COLA could be 9.8%.”
If inflation were to continue to increase and that 11.4% COLA increase becomes a reality (the Social Security Administration will not determine the actual 2023 COLA until inflation rates are tracked in July, August, and September), it would be historically high, topping 1981’s 11.2% COLA increase and trailing only 1980’s record 14.3% increase. This year’s 5.9% COLA increase was the biggest since 1982.
A high COLA will be eagerly anticipated to address an ongoing shortfall in benefits that Social Security beneficiaries are experiencing in 2022 because inflation is higher than their 5.9% COLA, Johnson said.
She added that if a 10.5% COLA were to come to fruition, it would increase the average retiree benefit of $1,668 by $175.10 per month (as rounded by the SSA).
According to The Senior Citizens League’s new Seniors Priority survey, 71% rank providing a cost of living adjustment that better protects Social Security benefits from the inflation experienced by older adults as a top priority for Congress.
June CPI data insights
Per this morning’s news release from the Bureau of Labor Statistics, the Consumer Price Index for All Urban Consumers (CPI-U) increased 1.3% in June on a seasonally adjusted basis after rising 1.0% in May. Over the last 12 months, the all-items index increased 9.1% before seasonal adjustment.
• SEE ALSO: Biden: Today’s Dismal Inflation Report ‘Out of Date’
The increase was broad-based, with the indexes for gasoline, shelter, and food being the largest contributors. The energy index rose 7.5% over the month and contributed nearly half of the all-items increase, with the gasoline index rising 11.2% and the other major component indexes also rising. The food index rose 1.0% in June.
The broad and faster-than-expected (economists in a Bloomberg survey predicted 8.8%) pickup in prices could spell trouble for the Federal Reserve, which may feel it has to stay on its aggressive path to raise interest rates.
“It’s not good news,” Kathy Jones, chief fixed income strategist at Schwab Center for Financial Research, told The New York Times. “We had hoped to see a little month to month easing in the core rate. We don’t have much of a break here.”
Despite today’s bad news on the CPI front, several signs are starting to emerge signaling that inflation rates could recede in the coming months. Commodity prices and inflation expectations are easing, and consumer spending is slowing. The average price of a regular-grade gallon of gas on July 11 was $4.67, down 12 cents over the last week and 34 cents from a month ago, according to the AAA.
Many economists have said they expect inflation figures to begin moderating in July.
Impacts of a high COLA
While a high COLA is better than no COLA at all, Johnson notes there are consequences that boosted Social Security income can have that affects overall financial security. For instance:
• The COLA doesn’t include some key costs that retired and disabled Social Security recipients have. Even though it may be the highest COLA in 40 years, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) does not account for increases in the Medicare Part B premium. In 2022, Part B increased 14.5%, one of the highest jumps in program history. The Part B premium is automatically deducted from Social Security checks, and in 2022 beneficiaries are still smarting from this.
• COLAs affect income. Higher income often leads to cuts in income related benefits for low-income people, and higher taxes for those with incomes above $25,000 individual and $32,000 married couples. This tax impact is not felt until tax time (starting in April 2023 and 2024). The Senior Citizens League believes tens of thousands of retirees who have not paid taxes on their benefits in the past, may discover they must start doing so in 2023. Because the income thresholds are not adjusted like ordinary tax brackets, these once-in-a-lifetime COLA increases could lead to permanently higher taxes for many retirees.
• Higher incomes can lead to a loss of income adjusted Medicare health and prescription drug benefits for low income, beneficiaries. Higher income individuals can wind up paying higher Medicare Part B and Part D benefits.
SEE ALSO:
• You Won’t Believe the Size of This 2023 Social Security COLA Estimate
• Latest 2023 Social Security COLA Estimate Holds Steady (and Still Huge)
• Social Security Benefits Lose 40% of Buying Power Since 2000
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
