Many seniors derive most of their income from Social Security. Some even get all their income from the monthly benefits they receive. As such, it’s easy to see why seniors can’t wait to hear what their cost of living adjustment (COLA) will be in 2023.
Every year, Social Security benefits qualify for a COLA, and that increase is based on inflation. With inflation rampant in 2022, the 2023 COLA could well be the biggest beneficiaries have seen in decades. But that doesn’t mean it still won’t get seniors in trouble.
A major flaw in the way COLAs are calculated
The impartial Senior Citizens League recently collected some numbers and found that since 2000 Social Security beneficiaries have lost 40% of their purchasing power. Specifically, it was found that the cost of living for seniors has increased by 130% in the past 22 years, but benefits have only increased by 64%.
How is that possible? The problem comes down to using the wrong measure to calculate COLAs.
COLAs have long been based on the consumer price index for urban wage earners and white-collar workers (CPI-W). But that index doesn’t accurately measure the costs seniors face specifically.
Take care for example. While not a huge factor in the CPI-W, for many seniors, health care is the single largest expense, exceeding even housing. Instead, the CPI-W takes into account factors such as gas costs. But while those could affect employees who regularly commute to work, retirees are likely to spend less on gas because many don’t have to drive to work every day.
That’s why senior attorneys have called for changes in Social Security COLA. And a common proposal is to use another metric to calculate annual increases: the Consumer Price Index for the Elderly (CPI-E). The logic is that since seniors have unique expenses that their younger, working counterparts may not have (or not to the same extent), it makes sense to factor them into COLA calculations.
Unfortunately, the CPI-E hasn’t gained enough traction so far, as the 2023 Social Security COLA will actually be based on third-quarter data from the CPI-W. But the hope is that over time, lawmakers will see the benefits of switching to the CPI-E.
Ready for a big announcement
Seniors with social security cannot afford to continue to lose purchasing power. A simple but effective change can break an otherwise unhealthy cycle and put retirees in a much stronger financial position than they are today.
But in the meantime, today’s Social Security recipients will no doubt be glued to the news on Oct. 13. That’s when the Social Security Administration is expected to announce next year’s COLA, along with other major changes to the program, such as the annual income test cap (which determines how much income Social Security recipients can earn before impacting their benefits).
It’s an announcement that many seniors are eagerly awaiting. But the unfortunate reality is that many Social Security beneficiaries could be seriously disappointed by next year’s COLA — if not at first, then in practice once they see what little bit of extra purchasing power it will give them.