As news broke this morning that the 2023 Social Security cost-of-living adjustment will bring a historic 8.7% increase, retirement industry experts are speaking out about the implications of such an increase and rekindling some simmering arguments about how the COLA is calculated.
Here’s a roundup of what’s being said in light of today’s COLA announcement that will increase the average Social Security check by more than $140 per month in 2023.
More of a ‘necessary adjustment’ than a raise
“Given today’s news about the 8.7% Social Security COLA increase coming next year, it’s understandable that retirees might feel better about their ability to manage rising costs in 2023. However, it’s important to remember that this COLA increase should not be thought of as a ‘raise,’ but rather a necessary adjustment to help ensure that retirees living on a fixed income can keep up with record inflation,” said Kelly LaVigne, vice president of consumer insights at Allianz Life.
The COLA news underscores the importance of having a solid Social Security strategy as part of a retirement plan, Lavigne added. “According to our recent Retirement Risk Readiness Study, more near retirees (40%) and pre-retirees (35%) believe that people will get enough from Social Security to meet their needs in retirement; only 10% of retirees said this is true.”
Lavigne stressed that Americans should have contingencies built in to their retirement plans for challenging conditions/volatility like we’re experiencing right now. “Miscalculating how much you can depend on Social Security benefits can have a detrimental effect on your financial health throughout retirement,” he concluded.
Lawmakers need to act now to shore up program
“Today’s COLA announcement serves as yet another reminder that policymakers must take swift action to shore up Social Security; they simply cannot afford to delay any longer.”
Bipartisan Policy Center Analyst Emerson Sprick
Bipartisan Policy Center Analyst Emerson Sprick said in a blog post today that the 8.7% increase for 2023 announced today will provide current beneficiaries welcome respite from ongoing price increases but also potentially hastens the impending depletion of Social Security’s primary trust fund.
“Experts, elected officials, and stakeholders have understood the extent of this problem for decades, but typical partisan lines in the sand and fear of political consequences have stymied action. Today’s COLA announcement serves as yet another reminder that policymakers must take swift action to shore up Social Security; they simply cannot afford to delay any longer,” BPC’s Sprick writes.
“The 2022 Social Security Trustees Report released in June (which assumed this COLA would be 3.8%) estimated that the program’s Old-Age and Survivors Insurance (OASI) trust fund will run dry in 2034, at which point all beneficiaries will face an immediate 23% benefit cut to bring payments in line with program income (mainly payroll taxes),” Sprick continued. “The difference between scheduled benefits and funded benefits will continue to grow for decades as the population over the age of 65 reaches unprecedented levels. Far from a minor inconvenience, this cut will devastate many retirees, especially the roughly 20% of Americans aged 65 or older who rely on Social Security benefits for over 75% of their income.”
• See the full BPC blog post here.
More on the CPI controversy
Chad Parks, Founder and CEO of Ubiquity Retirement + Savings, says cost of living adjustments were baked into the system as a way to ensure that as prices rise, the absolute dollar being paid out to beneficiaries will increase accordingly.
But he points to controversy around how it’s measured. “The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) formula is currently used and accounts for an individual’s average expenses of certain goods and services. When interest rates and inflation are low, there is a smaller adjustment. With inflation hitting record highs in 2022, a larger increase is on the horizon. In one way, this means the system is working, as it’s designed to keep up with prices. However, this also means the surplus is running out,” Parks said.
“If we see no changes, a reduction in benefits could be possible in 2034,” Parks added, echoing the 2022 Social Security Trustees Report estimate. “At the same time, we will continue to keep a close eye on the rollout of state mandates, and tax incentives, credits, and other motivators to remind business owners and individuals of the importance of retirement preparedness.
CPI data overstates ‘true’ rate of inflation
Olena Staveley-O’Carroll, economics professor at College of the Holy Cross in Worcester, Mass., said today she believes that as price levels rise, so must nominal benefits (wages, salaries, Social Security, etc.) to protect people’s purchasing power.
She said the Consumer Price Index tends to overstate the “true” rate of inflation, as pointed out in an influential Boskin Commission Report to the Senate in 1996, for well-understood reasons.
“The Federal Reserve uses a different measure of inflation, called PCEPI (Personal Consumption Expenditure Price Index), when setting the U.S. monetary policy. For example, last month’s CPI inflation was 8.2%, compared to PCEPI inflation of 6.3% (no September PCEPI numbers yet). Thus, some could argue that Social Security recipients will be ‘over-compensated’ following the 8.7% CPI-based adjustment,” Staveley-O’Carroll said.
“The overall CPI numbers, however, mask the difference in consumption patterns between average U.S. households and retirees. Arguably, the latter consume fewer transportation services (like commuting to work) and so benefit less from the falling gas prices (down 5.6% since last month). On the other hand, retirees consume more medical care services (up 0.7% since last month and 6.5% since last year) than the average, and so are hit harder in this particular category,” she said.
“Between CPI overstating inflation, and retirees’ consumption basket being skewed away from energy and towards medical care, it’s not immediately obvious that the proposed 8.7% increase in SS benefits is adequate.”
NARFE: Change to CPI-E
NARFE National President Ken Thomas, the national president of NARFE, and organization solely dedicated to the general welfare of all federal workers and retirees, said that while today’s increase comes as no surprise, rising health care costs and the “unfair treatment of specific federal annuitants” could reduce the value of this adjustment.
“Seniors spend more on health care than any other segment of the population, and those who enroll in Federal Employees Health Benefits plans for 2023 will see an average increase of 8.7% in their share of premiums, the biggest jump since 2011,” Thomas said.
“For years, NARFE has urged Congress to address the inequity of COLAs that don’t keep up with rising health care costs by passing legislation requiring the BLS to calculate COLAs based on the consumer price index for the elderly (CPI-E) instead of the consumer price index for workers (CPI-W).”
Thomas added that health care costs are poised to continue their ascent. “Estimates from the Federal Reserve Bank of Dallas last month indicate the rate of health care inflation could double by mid-2023. Seniors need relief. I urge Congress to pass the Fair COLAs for Seniors Act and ensure retirement income keeps pace with the rising costs seniors face.”
IRI: Raise helps, but retirees need more help
While acknowledging today’s 8.7% increase will help retirees, the Insured Retirement Institute (IRI) issued a reminder that workers need more help in saving for retirement and pressed lawmakers to pass the SECURE Act 2.0 legislation currently under consideration.
“A cost-of-living increase in 2023 Social Security benefits is welcome news to the tens of millions of beneficiaries who rely on those monthly payments as a source of income to live on during their retirement years, said Wayne Chopus, IRI President and CEO. “However, workers and retirees need more than Social Security to achieve a financially secure retirement. They must have options to save and invest those savings during their working years. Offering workers additional opportunities, such as annuities, will allow them to accumulate savings and, more importantly, generate protected income to help sustain them throughout retirement.”
IRI is advocating for the SECURE 2.0 retirement security legislation that would enhance features of employer-provided retirement plans, expand the opportunities for more workers to save for retirement, and facilitate the use of protected lifetime income solutions.
Key features of the bills as noted by IRI include:
- Increasing the age at which individuals must withdraw a portion of their tax-deferred retirement savings to 75
- Providing help for employees to save for retirement while repaying student loans
- Allowing greater use of Qualifying Longevity Annuity Contracts (QLACs) to insure against the risk of outliving retirement savings
- Increasing catch-up contributions to retirement plans for Baby Boomers
- Enhancing start-up tax credit to encourage small businesses to establish workplace plans
- Offering tax credits to employers who provide a workplace opportunity for spouses of active military personnel to save for retirement.
“Social Security is an important part of the U.S. retirement system that provides essential income to retirees,” Chopus said. “But too many workers and retirees continue to face anxiety about whether they will have retirement income to sustain them throughout their lifetimes. Congress took a major step forward three years ago to address some of that anxiety and is now close to enacting another comprehensive retirement security law. Extending access to workplace retirement plans and facilitating the use of lifetime income products in those plans will help deliver a secure and dignified retirement to millions more of America’s workers.”
SEE ALSO:
• Historic 8.7% Social Security COLA Finalized for 2023
• 3 Bills Aiming to Strengthen Social Security: A Closer Look
• Bernie Sanders: Expand Social Security; Lindsey Graham: Take Less, Pay More
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.
