Calculating COLA
Every year, Social Security checks get updated to account for inflation based on a measure called, “Consumer Price Index for Urban Wage Earners and Clerical Workers.” While it’s a mouthful, this cost of living adjustment, or COLA, simply takes the index’s average figures for July, August, and September and compares them to the same period the year prior. In July, the CPI-W number came in at 9.1%, 0.6% higher than that of headline inflation.
This year benefits were raised 5.9%, and trailed inflation’s trajectory. July’s high level indicates that next year’s boost is likely to be significant.
Potential for Major Increase
Some market observers predict the next COLA adjustment will be the highest in over 40 years. The last significant increase was in 1981, when soaring inflation prompted an 11.2% boost to Social Security payments. All eyes will be on the next two inflation reports from the Bureau of Labor Statistics, which will provide the data needed for next year’s calculation. September’s inflation reading will be reported by the BLS on October 13 and the Social Security administration is expected to announce the 2023 COLA shortly thereafter.
For those retirees experiencing inflation’s bite impacting their purchasing power, a significant boost to their payments may provide some welcome relief.
Offsets to Income
If benefits were increased 9.6%, retirees would see, on average, a monthly increase of $160 next year. However, because most Americans pay tax on a portion of their Social Security income, the net boost to spending power will be lower.
After being hit with a staggering 14.1% increase in Medicare Part B premiums this year, compared to 2021, the cash influx could come as welcome relief for some retirees. The good news is these premiums are not expected to go up in 2023. Ironically, in the case of COLA, high inflation can be good news.
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