Beneficiaries of Social Security witnessed the most significant cost-of-living adjustment in about four decades this year when they got a 5.9% increase in their monthly checks.
In 2023, this annual adjustment could go as high as 8%, as per early estimates. This may come even though the annual Social Security trustees report, which was published last week, revealed a 3.8% bump for the upcoming year.
“Looking at the CPI-W trends that we’re seeing so far this year, it is likely we’re going to have a COLA closer to 8% than 3.8%,” Stephen Goss, who serves as the Social Security Administration’s chief actuary, said last week at a briefing on the trustees report hosted by the Bipartisan Policy Center. The CPI-W he mentioned refers to the Consumer Price Index for Urban Wage Earners and Clerical Workers. It’s a subset of an even more expansive measurement for changes in goods and services’ prices.
The trustees report also mentioned a 3.8% COLA projection for 2023, and it is based on data through mid-February. However, the almost-record-breaking inflation has remained since then, moving the potential increase for the upcoming year higher.
“That is actually good news for the beneficiaries who are currently eligible for benefits in this year,” Goss stated, adding, “They will get a relatively high increase to their benefit.”
Inflation Influences Social Security's Annual COLA
It is possible for 2023’s COLA to fluctuate prior to its formal announcement later this year. Although, inflation is a key factor needed to be watched.
Social Security’s annual COLA comes from comparing the CPI-W data from Q3 of the current year to Q3 of the year before.
Therefore, 2023’s COLA will be influenced by how inflation would go in July, August, and September.
Having an 8% COLA is the highest increase in many years, as per Social Security Administration data. The last time SSA announced a larger yearly increase was back in 1981, which saw an 11.2% bump.
If COLA reaches a record high, average wage increases may offset it, according to Goss.
Despite the trustees projecting a 5.6% increase in wages for 2021, the data obtained from W-2s so far indicates that the rate is more likely around 8%, he added.
This has resulted in the levels of both the COLA and average wages being higher than what was projected.
“To the extent that those tend to balance each other, in terms of impact on the solvency of the program, we’re expecting there’s not going to be really a major impact on that,” Goss also said.
Although, several experts expressed concern regarding having a record-high COLA for 2023 as it might hurt the Social Security’s funds.
The recently published trustees report pointed out an improved outlook for the trust funds the SSA relies on to pay benefits. It has now been projected for the combined asset reserves of both funds to have the depletion year of 2035, which is a year later than last year’s projection. By that time, 80% of the benefits will be payable.
Meanwhile, a much larger COLA will cost Social Security a lot of money – possibly tens of billions of dollars. This puts more pressure on the program even though its already facing insolvency, according to Maya MacGuinease, the president of the Committee for a Responsible Federal Budget.
“That will cost the program enough money that it could bring the insolvency date forward a year sooner,” MacGuineas also mentioned.
She also stated that it would be a major abdication of responsibility if Congress does not act to attempt to repair the program.
“There’s not one member of Congress who should look at this report and think, ‘Oh, I know the best course of action is to do nothing,’” MacGuineas stated.