Article 43


Thursday, October 13, 2022

Social Security 2023 COLA

image: social security card

The 2023 COLA is based on the increase in the Consumer Price Index for Urban Wage Earners (CPI-W) between the third quarter of 2021 and the third quarter of 2022 meaning it looks backwards at inflation and was sealed this morning when the Bureau of Labor Statistics reported September’s inflation rate. 
- Social Securty 2023 Jump, Forbes, October 13, 2022


How the CPI-E Compares With the CPI-W for the Annual Social Security COLA

By Devin Carroll
Social Security Intelligence
October 13, 2022

If the annual cost of living adjustments to benefits would have been based on the CPI-E, instead of the current CPI-W, the benefit increase in 2022 would be 1.1% lower!

Recently, the Social Security Administration announced yet another Social Security cost of living adjustment. And once again, the amount of the adjustment left some wondering why it wasn’t higher.

The announcement ignited the same conversation and questions as it does every time. In the comments of my videos, MY FACEBOOK GROUP, and on my website, many people say things like, “My expenses have increased a lot more than this cost of living adjustment,” or, even more commonly, “There has to be a better way to measure the increases to living expenses than the way it’s being done now!|

Given that it’s such a common response to the usual Social Security cost of living increases, I want to cover the proposal that may change how these adjustments are calculated.

How Social Security Benefits Cost of Living Adjustments Are Made Today

Right now, Social Security benefits are automatically adjusted every year. The Social Security Administration uses a certain measurement of inflation to determine if benefits should be increased or not.

The measurement they currently use is the CPI-W, which stands for the Consumer Price Index for Urban Wage Earners and Clerical Workers. This inflation gauge is compiled and published by the Bureau of Labor Statistics.

Although they release this on a monthly basis, the Social Security Administration (SSA) only uses the data for the third quarter when making the adjustment to Social Security benefits. That means they look at the data for July, August, and September each year.

To determine a potential increase in Social Security benefits to match an increased cost of living, the SSA adds the sum of the index for the prior years third quarter and compares it to the sum of the third quarter index for the current year. If the difference between the two numbers is positive, Social Security benefits increase. If there is no increase in the CPI-W, then there is no cost of living adjustment for the year.

ItҒs really pretty simple but some folks believe itŒs not very effective.

Theres an argument against this way of determining cost of living adjustments for Social Security benefits.

Some say the CPI-W measurement method may not be the best because retirees spend their money very differently than individuals who are not retired. Retirees tend to spend more on healthcare and housing, and less on gasoline, education, and consumer electronics.

As a fix for this, it has been widely suggested that the Social Security Administration should discontinue basing the annual cost of living adjustments on the CPI-W and instead start using a measurement known as the CPI-E.

Considering Costs Specific to Retirees: The CPI-E Proposal

This version of the CPI is meant to track the expenses specifically for Americans who are 62 years of age or older. While both of these indexes measure the same categories of goods and services, they have different weightings to the categories.

So for example, the CPI-E factors in around 11% of its index to healthcare cost. The CPI-W, however, only counts 5.6% of the overall index as healthcare expenses. Since statistically, seniors spend more of their money on healthcare, an index that assigns a higher weighting should be more accurate to the way they spend money and experience inflation.

There are some other differences in weightings between the CPI-W and the CPI-E that may be significant for determining cost of living adjustments for Social Security benefits. In total, each index measures 8 main categories:

· Housing

· Transportation

· Food and beverages

· Medical care

· Recreation

· Education and communication

· Apparel

· Other goods and services (for the stuff that doesnt fit anywhere else)

As you can see from this chart the two big differences are the weightings assigned to housing expense and medical care:

image: cpiw cpi-e weighing scales

The big question here is, how does this affect the actual cost of living adjustment for benefits? Would it result in a larger benefit increase for seniors?

Using the CPI-E data available from December 1982, we can go back and do a year-by-year comparison with the CPI-W, the version thats currently being used.

When viewed side by side, you can see that there are some years where the CPI-W was ahead, those are the red bars, but in most years the CPI-E was slightly higher.

image: cpi-w cpi-e compared

If you average the difference between the two measurements since 1984, the CPI-E has been about 0.2% higher per year. So yes, in most years the CPI-E would yield a higher cost of living adjustment than the CPI-W, but there are some years (like the COLA announced for 2022) where the CPI-W was higher than the CPI-E.

The CPI-E Is Not A Magic Formula

This highlights the reluctuance of legislators to make this switch. On paper, it sounds good. An index that more accurately represent the expense of retirees should work better. But no politician wants to be responsible for making this switch in a year where the new method results in worse results.

Additionally, there are a few problems with the measurement method. First, the Bureau of Labor Statistics is very blunt about this being an “experimental” index. The Government Accountability Office also released a report this year that identified several issues with the potential accuracy of the CPI, and specifically mentioned the small sample size of the CPI-E as a factor.

The CPI-E sounds great to many folks who receive Social Security benefits and feel like their costs go up more than their Social Security income does. But ultimately, there is no magic formula that works well enough to keep everyone happy.

I know that with the current fiscal challenges that the Social Security system is facing, I wouldn’t expect a more generous formula for increasing benefits. But as this conversation continues to develop, I’ll keep you informed right here.

If you still have questions, you could leave a comment below, but what may be an even greater help is to join my FREE FACEBOOK MEMBERS GROUP. It’s very active and has some really smart people who love to answer any questions you may have about Social Security. From time to time Ill even drop in to add my thoughts, too.



Five things to know about todays Social Security COLA

By Tobias Burns
The Hill
October 13, 2022

Social Security payments will increase by an average of $140 per check as the national pension plan is set to receive its biggest cost-of-living adjustment (COLA) in 40 years.

The hike came in at 8.7 percent, an attempt to close the gap caused by inflation that reached as high as 9.1 percent in June before tapering off slightly over the summer. Between 2010 and 2020, Social Security COLAs averaged just 1.7 percent.

Social Security is adjusted in the third fiscal quarter every year and is the primary source of income for most of AmericaҒs seniors, according to the agency. In June, nearly 50 million retired workers and their families received more than $80 billion, with the average monthly benefit totaling $1,670.

Many disabled workers are also supported by Social Security. In June, they received more than $10 billion for an average payment of $1,362.

In total, the program pays out more than a trillion dollars each year from a dedicated payroll tax, making up 17 percent of the national budget in 2021, according to the Treasury Department.

More than 70 million Social Security beneficiaries will be affected by the adjustment, which will go into effect over December and January.

Here are five takeaways from Thursdays COLA.

The COLA allows recipients to break even

While an additional $140 per month is a sizable increase for people who receive a Social Security check, the extra money is really just a break-even number to offset the cost of high inflation.

The consumer price index report released Thursday showed annual inflation increased 8.2 percent, remaining near 40-year highs and showing little sign of slowing down.

While energy prices slackened by 2.1 percent in September, theyҒre still 19.8 percent higher than they were last year. Prices for food are also continuing to increase, up 0.8 percent on the month and 11.2 percent on the year.

Consumer inflation has been above 8 percent since March, eating into paychecks and diminishing the value of Social Security payments. So while the 8.7 percent COLA will come as a relief to seniors, it will only normalize their standard of living back to where it was a year ago rather than giving them surplus income.

“This is not a benefit increase, its an adjustment to keep pace with inflation, and of course prices are rising to very high levels right now,Ҕ Nancy Altman, a Social Security advocate and co-director of the nonprofit organization Social Security Works, said in an interview. But the COLA is an extremely important feature, because without it benefits would erode over time.”

The COLA is especially important amid stock market declines

Many seniors receive benefits from private pension plans such as 401(k)s that are widely invested across the stock market in addition to Social Security.

The stock market has been performing poorly lately due to interest rate hikes by the Federal Reserve that are intended to cool inflation, so the performance of many broad-based investment vehicles has been diminishing. 

This makes the COLA, which is a monetary modification thats independent of market performance, especially powerful by comparison.

|The whole concept of a COLA is a big deal,| Altman said. “It often gets ignored because theres normally just a small cost-of-living increase, or sometimes there’s none. But if inflation goes up 20 percent, you get a 20 percent increase. It’s not capped, and that’s an important concept, especially now”

Since the Fed started raising interest rates back in March, the big stock indices have seen major declines, falling more than 20 percent into bear market territory and taking many retirement plans with them.

The Dow Jones Industrial Average is down 7,781 points, 21.51 percent, since the beginning of the year. The S&P 500 is down 26.62 percent and the technology-heavy Nasdaq index, whose companies tend to carry a lot of debt and so are particularly susceptible to interest rate hikes, has fallen more than 35.43 percent.

Medicare premiums are decreasing

ThursdayԒs COLA announcement follows a drop in the price of the premium for Medicare Part B, which covers hospital and doctor visits another boon for seniors, though a smaller one.

In September, Medicare determined that the Part B premium would be 3 percent lower in 2023, dropping to $164.90 from $170.10 in 2022. Those payments are usually taken directly out of Social Security checks, so that could mean an additional $5 dollars a month on average for seniors on top of the $140 COLA boost.

Part B deductibles will also drop to $226 in 2023, a decrease of $7 from the annual deductible of $233 in 2022.

These changes are especially significant for people who don’t have much income, since their Social Security payments can often be eaten up by their Medicare premiums as part of the same effective payment.

But the rising COLA together with the falling premium means that people on the lower end of the income spectrum could feel a significant increase in monthly payments beginning in 2023.

The COLA will help more people than just retirees

Millions of children in the U.S. with retired or deceased parents also receive Social Security benefits each month.

דEach month during 2021, we paid an average of $2.8 billion in benefits to 4 million children whose parents (one or both) were retired, deceased, or were disabled, the Social Security Administration said in a statement back in June.

And that number excludes children who are taken care of by grandparents receiving Social Security benefits. As many as 2.5 million grandparents in the U.S. have the primary responsibility of caring for grandchildren, according to research from North Dakota State University.

“Economic hardship in the U.S. and recent social challenges have contributed to the increase in multiple-family generations living together to save costs and share resources,” a 2021 report from the university found.

Grandparents living in multigenerational homes are “quite common” and are often “providing help with financial difficulties and working to provide basic needs and save economic resources,” the report found.

Congress considering inflation measurement specifically for seniors

The COLA is based on a measure of inflation called the CPI-W, which measures the spending habits of urban wage earners and clerical workers. Accordingly, experts refer to the COLA as wage-indexed.

The Labor Department also measures the spending habits of seniors in a metric known as the CPI-E - EӔ for elderly - but the Social Security Administration doesn"t use that number to figure out by how much it should adjust its checks.

Congress would need to authorize the use of the CPI-E for the COLA, which could affect how much seniors pay on important expenses like prescription drugs.

Rep. John Larson (D-Conn.) has one such proposal, which he says |would help seniors who spend a greater portion of their income on health care and other necessities.”

In a Thursday statement released along with the COLA, Larson touted his legislation, encouraging the “new measure of inflation that takes into account actual expenses incurred by seniors.”


Posted by Elvis on 10/13/22 •
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