When a team wins a national championship, fans almost immediately begin to speculate about a repeat performance. There is a natural question that arises after almost every momentous event: will it happen again?
Many Americans almost certainly have a momentous occasion in store soon. The annual Social Security Cost of Living Adjustment (COLA) will be announced in October. Experts predict the increase could be the highest in decades.
But are huge back-to-back Social Security increases on the way over the next two years? This is what history shows.
The Social Security program was implemented in 1935. COLAs haven’t been around that long, though. Before 1975, the United States Congress decided the amount of each annual increase in Social Security benefits.
The purpose of COLAs is to prevent Social Security benefits from being eroded by inflation. Thus, the amount of each annual increase depends on inflation.
The Social Security Administration (SSA) calculates the annual COLA by determining the increase between the average of the consumer price index for urban wage earners and white-collar workers (CPI-W) for the third quarter of the current year and the average of the metric for the same quarter of 2017. the previous year. If the CPI-W average in the third quarter of the current year is equal to or lower than in the previous year, Social Security beneficiaries will not receive an increase in benefits.
A mixed bag
So what do the past Social Security increases tell us about the possibility of massive back-to-back COLAs in 2023 and 2024? It’s a mixed bag.
In the entire 46-year history of automatic COLAs, there have been only 11 years where the increase has been 5% or more. Seven of these 11 years were followed by another year with a COLA of at least 5%. With many predicting a major increase in Social Security in 2022, the total could quickly rise to eight.
It is important to note, however, that all but three of these major COLAs occurred during eight consecutive years, beginning in 1975. Since 1982, three out of four Social Security increases of 5% or more have been followed by a lower COLA in the following year. There was no benefit increase in 2009 after a COLA of 5.8% in 2008.
Looking beyond history
The reality is that there is no clear pattern with previous large increases in Social Security. But we can look beyond history to find some clues as to how big this year’s and next year’s COLAs may be.
Inflation is currently at its highest level since the early 1980s. But there are signs that inflation could go down.
Petrol prices reached a record high in mid-June. However, gas prices have fallen sharply in recent weeks. The series of consecutive days of falling prices is the second longest since 2005.
These lower prices are likely to appear in other areas soon. Transportation costs are a major driver of the prices of many products, including food, electronics and household items.
In July, house prices fell for the first time in three years. The 0.77% drop is the biggest one-month drop since January 2011. Moody’s Analytics thinks US home prices will continue to fall.
The Federal Reserve has already shown its determination to fight inflation by raising interest rates. More rate hikes that help lower inflation could be on the way.
Two important questions
It remains to be seen exactly how high the COLA will be this year. Some predict the increase will exceed 10%. Others think the COLA will be lower. However, an increase in Social Security benefits of at least 7% seems likely.
A second important unanswered question is how much and how quickly inflation will decline with fuel and housing prices falling and the Federal Reserve poised to raise interest rates even more. The last time inflation was as high as it is now, aggressive action by the Fed brought inflation below 5% in less than 12 months. So if history repeats itself, there probably won’t be two huge back-to-back Social Security increases on the way.
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Keith Speights has no position in any of the listed stocks. The Motley Fool holds positions in and recommends Moody’s. The Motley Fool has a disclosure policy.