With the government's latest inflation numbers in hand, Social Security experts now say they expect the 2023 Social Security COLA (cost-of-living adjustment) to be about 8.5% to 9%.
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That means the bump in your Social Security payment next year might actually beat inflation. "I think it's extremely likely the 2023 Social Security COLA will be higher than the 2022 inflation rate as measured by the CPI-U," said Marc Goldwein, senior policy director of the Committee for a Responsible Federal Budget (CRFB), a nonprofit public policy group.
The CPI-U is the consumer price index for all urban consumers. The Social Security COLA is based on its cousin, the CPI-W, which is the CPI for urban wage earners and clerical workers.
Similarly, Mary Johnson, Social Security analyst for The Senior Citizens League (TSCL), now forecasts a 2023 Social Security COLA of 8.7%. "A COLA of 8.7% would increase the average retiree benefit of $1,656 by $144.10," said Johnson, who rounded her dollar figures.
If you already receive a monthly benefit, you can calculate the impact of an 8.7% Social Security COLA by multiplying that benefit by 0.087. You add the resulting amount to your current benefit.
For example, if your benefit is $1,000, multiply it by 0.087. The result is $87. Add that to your current $1,000 for a projected benefit of $1,087.
"A COLA of 8.7% is extremely rare and would be the highest ever received by most Social Security beneficiaries alive today," Johnson said. "There were only three other times since the start of automatic adjustments that it was higher. Those years were 1979, 1980 and 1981.
2023's COLA Vs. 2022's
A Social Security COLA of 8.5% to 9% would be about 50% higher than the 2022 COLA of 5.9%, Goldwein says.
It is even possible that the 2023 Social Security COLA would match or exceed 2022's full-year inflation rate, Goldwein says. "Yes, it's not only possible," he said. "It's likely. The reason is that (the Social Security Administration) calculates the COLA based on the third quarter CPI-W, which is likely to significantly overstate the inflation experience for the population overall, let alone by seniors."
COLA Calculation
The Social Security COLA is based on certain inflation measurements. The formula looks at the third quarter's CPI-W. Basically, it compares the average CPI-W for July, August and September to the figure for that same period the year before.
In addition, inflation for key commodities such as gasoline appears to be subsiding. So CPI-W for the third quarter, which weighs heavily in the COLA calculation, could end up higher than CPI-W for the fourth quarter and for 2022 overall.
2023 COLA Could Top 2022 Inflation
It is "somewhat common" for the COLA to be based on inflation that is higher than the overall year's inflation rate, Goldwein says. "But usually the differences are so small it doesn't matter," he added.
A spike in energy prices in 2008 jacked up the COLA for 2009 to 5.8% from 2.3% the year before. The COLA increase was so far above the actual inflation rate that there was zero COLA in each of the next two years. "There was inflation in those years, but not enough to make up for the overly high COLA in 2009," Goldwein said.
Jump In Monthly Benefits
A 9% COLA would mean that roughly 64 million Social Security recipients will see a 9% jump in their monthly benefits, starting in January 2023.
A 9% COLA would be the largest Social Security COLA to benefits since the 11.2% increase that took effect in 1982. For the past 12 years COLAs have averaged just 2.1%.
Before last year's relatively high 5.9% COLA, the 12-year average was a more modest 1.4%.
The Social Security Administration is slated to release its actual 2023 COLA around Oct. 13.
Social Security COLA Vs. Inflation
Many retirees treat the annual Social Security COLA announcement as cause for celebration. But some years the adjustment is insufficient.
Inflation in the three measurement months of July, August and September may match or exceed inflation for the whole year. No one — except government bookkeepers — complains when the COLA tops inflation. The potential problem from the perspective of benefit recipients is that inflation in those three months can lag inflation for the full year.
The Social Security COLA "is a slightly delayed response to inflation, but it doesn't necessarily fail to keep pace with inflation," said John Hatton, vice president for policy and programs of the National Active and Retired Federal Employees Association (NARFE). "There may be timing issues from year to year. For example, if prices decline in the three measurement months, it may miss compensating individuals for past inflation. But there may be other years where prices spike during those measurement months, and then drop afterward. If prices simply stabilize — remain flat for the measurement months — the annual change will reflect the change in prices over the past year."
Benefits Lose Buying Power
And while the CRFB says it is "somewhat common" for the Social Security COLA to be higher than the base year's inflation rate, other watchdog groups say that over time COLAs cumulatively fail to keep pace with inflation.
Last year, The Senior Citizen League (TSCL) told IBD that since the year 2000, Social Security benefits had lost 32% of their buying power.
TSCL reached that conclusion by comparing Social Security COLAs with increases in the costs of goods and services typically used by retirees.
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