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Retirees who face higher prices due to record inflation could receive good news this week when the Social Security Administration announces the cost of living adjustment for 2023.
The rise in benefits is expected to be announced Thursday along with the new Consumer Price Index data for September.
The Senior Citizens League, a nonpartisan group of senior citizens, estimated last month that COLA could be 8.7% next year. That would make it the biggest increase in decades, topping this year’s 5.9% annual cost-of-living adjustment, which was the biggest in about 40 years.
“These are just estimates,” meaning the official change for 2023 could be higher or lower, said Mary Johnson, Social Security and Medicare policy analyst at the Senior Citizens League.
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The group estimated how the COLA will form each month as new CPI data is released.
The senior leagues estimate indicated a 10.5 per cent increase in benefits next year based on June data. However, the estimate fell to 9.6% the following month. and 8.7% based on the most recent August data.
The estimates are based on a subset of CPI data known as the Consumer Price Index for Urban Wage and Clerical Workers, or CPI-W. The Social Security Administration uses this measure to determine the COLA each year.
The annual COLA applies to Social Security and Supplemental Security Income benefits. The Social Security Administration determines the annual adjustment by calculating the percentage change in the CPI-W between the third quarter of the previous year and the third quarter of the current year.
The fact that estimates have fallen in recent months does not necessarily coincide with lower inflation for seniors, according to Johnson.
“Food prices are the first place older consumers are going to feel inflation, and those prices rose significantly in August,” Johnson said.
Beneficiaries risk seeing larger checks in 2023
Importantly, recipients are set to see more of the 2023 COLA increase in their monthly benefit checks, according to Johnson.
The reason: Medicare Part B premiums, which are typically deducted directly from benefit checks, as the standard monthly premium is expected to drop by $5.20 next year to $164.90, from $170.10 in 2022.
“This means recipients will be able to keep most or all of their COLA increase,” Johnson said.
Certainly, some recipients may also have tax deductions taken from their monthly checks.
“Before deductions, people will really see virtually all of their COLA in their Social Security check,” Johnson said.
As the Federal Reserve continued to raise interest rates, this could be reflected in September CPI data and consumer confidence.
The Fed raised the target federal funds rate by 0.75 percentage points on September 21. But the previous interest rate increase of the same magnitude that occurred in July will likely have a greater influence on the September data, according to Johnson.
What could happen to benefits beyond 2023
Future COLAs may not be as large as the much larger increase predicted for 2023.
If there is a recession, it could prompt inflation to shift to deflation, where prices fall, Johnson said.
In the midst of the Great Recession, a 5.8% COLA was announced in 2008 and took effect in 2009. But the next two years saw a 0% benefit adjustment.
“We might experience something like this if we go into a recession,” Johnson said.
A higher COLA in 2023 will put additional pressure on Social Security trust funds, which already face an estimated 13-year time horizon to pay full benefits, the Committee for a Responsible Federal Budget said in June.
A much larger COLA will add tens of billions of dollars to the program’s liabilities, Maya MacGuineas, chair of the Committee for a Responsible Federal Budget, told CNBC.com at the time.
“It will cost the program enough money to bring the insolvency date forward by a year,” MacGuineas said.