Largest Social Security Increase in Over 40 Years!
Social Security is about to have its largest increase in 40 years. Since most older adults in the US rely on Social Security for over half their income, this adjustment will have a big impact on many Americans.
Every year around August or September, the federal government starts evaluating what inflation has done to the cost of everyday items and how it affects Social Security. They weigh these numbers against the current payable Social Security benefits and apply a cost-of-living adjustment (COLA) to help offset inflation.
We were excited by last year’s 5.9% increase, a pretty healthy number at the time, especially considering that years like 2015 and 2016 saw increases of 0% and 0.3%, respectively. We know inflation has grown much higher than Social Security has reflected in recent years, so it’s great to see the Feds helping us catch up.
This Year’s Cost-of-Living Adjustment
The COLA taking effect in December 2022 is 8.7%. We haven’t seen a cost-of-living adjustment above 7% since 1982, and COLAs were only enacted in 1975, so this is really saying something.
An increase of 8.7% is undoubtedly impressive, but it’s still lower than various groups were projecting earlier in the year. For instance:
- In July, Newsweek predicted a COLA of 11.4%.
- In July, CNBC predicted 10.5%, which they decreased to 9.6% one month later.
- In August, the American Association of Retired Persons (AARP) predicted 9%.
We’ve all experienced this year’s incredibly high inflation firsthand, but a few things changed between the summertime predictions and the COLA announcement in October. For instance, gas prices rose to a national average of $5 per gallon in June but have since fallen to under $4 per gallon.
Gas prices are a significant consideration when deciding the COLA because transportation is a big factor for the Consumer Price Index (CPI). Gas prices also roll over into other things like utilities, the costs of goods and services, and more.
Consumer Price Index
It’s important to understand that inflation is measured in a few different ways, depending on the age group in question. Typically, when we talk about inflation, we’re referring to the Consumer Price Index for Workers (CPI-W). This general index considers the price of clothes, transportation, medical care, housing, and other factors.
Social Security involves a specific age group, which is where another measurement called the Consumer Price Index for the Elderly (CPI-E) comes in. This looks at price changes most likely to affect households with people over age 62.
When comparing the different weights of various factors, you first notice that the cost of medical care and prescription drugs is weighted about twice as high for the CPI-E than the CPI-W. Next is housing, which tends to cost more for seniors because of assisted living and caregiving needs.
Because of these differences, Social Security cost-of-living adjustments should be based on the Consumer Price Index for the Elderly. Otherwise, they don’t accurately reflect the changing prices that seniors experience. Even the increases we’ve seen in recent years, which have been relatively low prior to 2021, haven’t allowed seniors to keep up. After all, elderly people tend to be disproportionately affected by inflation compared to the general population.
An article by The Senior Citizens League, a non-partisan advocacy group focused on seniors, recently weighed in on this matter, saying that since 2000, inflation has decreased the purchasing power of seniors by over 40%. So even though an 8.7% increase is a step in the right direction, we’ve got a long way to go before Social Security benefits catch up with inflation.
Medicare Part B
Medicare is another issue that plays significantly into the cost of living for seniors. Last year, Medicare Part B went up from $148 to $170 per month, or about a 14.5% increase, eating a large chunk out of the 5.9% cost-of-living adjustment.
As the government formulated Part B costs for 2022, a new Alzheimer’s drug had just come out. This was anticipated to be extremely popular but also very expensive. In response, the government preemptively built the price into the cost of Part B.
Now, a year later, it turns out the drug was not very popular and not that expensive. Fortunately, the government has recognized the overcharge and is actually lowering the cost of Part B in 2023 to $164.90. This decision makes this year’s 8.7% COLA that much more impactful.
Learn More from Nelson Financial Planning
If you’re wondering how to budget your income and expenses with the upcoming Social Security increase, turn to Nelson Financial Planning to learn more. Our Certified Financial Fiduciaries can help you change your life with a successful financial plan that provides peace of mind for the future.
For more information, please contact us online or call our Winter Park, FL, office at 407-629-6477.
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