Seniors who depend on Social Security benefits will soon receive the largest cost of living adjustment (COLA) in the last 40 years. The 8.7% increase in Social Security payments will take effect in January 2023.
The COLA is tied to the consumer price index. A poor economy resulted in no Social Security benefit increase in 2010, 2011, and 2016. Worldwide inflation, triggered in part by a shrinking workforce and rising demand after pandemic restrictions eased, was responsible for a steep rise in the consumer price index during 2021 and 2022.
The average Social Security benefit check in 2022 was $1,681. In 2023, the average benefit will increase to $1,827 per month. In December, Social Security recipients should be notified by mail of the new benefit. Recipients can also visit their my Social Security Account page online to check the amount of their new benefit.
Rising Prices May Offset Rising Benefits
The COLA will help seniors catch up with rising costs. The increase will particularly help seniors who have a fixed mortgage payment and those who have paid their mortgages. Since they do not need the increase to keep up with housing costs, they can use the extra money to address the rising cost of fuel, food, and electricity.
Renters are less fortunate. Surging prices in the rental market are only partially related to inflation. Analysts offer differing explanations for high rents and disagree whether rents are likely to stabilize in the near future.
Unfortunately, eldercare facilities have not been immune to the phenomenon of rising housing costs. Long-term care providers, including nursing homes, assisted-living facilities, and independent-living communities, have increased their costs by as much as 10%. When the Social Security COLA is less than an increase in housing costs, seniors fall behind.
On the bright side, the premium for Medicare Part B coverage is decreasing by a few dollars in 2023. The annual Part B deductible will also decrease, leaving a few more dollars in the pockets of Medicare recipients. In the past, increased Medicare premiums tended to eat up much of the Social Security COLA.
Seniors Are Losing Their Buying Power
A recent study by Senior Citizens League found that the “buying power of benefits of those who retired before the year 2000 has eroded by 40 percent.” Since 2000, Social Security COLAs grew benefits by 64%. In that same time frame, typical expenses incurred by seniors increased by 130%.
Prescription drugs, uncovered medical expenses, homeowners’ insurance, gasoline, food, and veterinarian services have all risen in price at a substantially higher rate than Social Security COLAs since 2000. When the recent increase in energy and housing costs are included in that list, it is easy to understand why the buying power of retirees is falling despite benefit increases.
The price index used to calculate Social Security COLAs is the CPI-W, a subset of the CPI that reflects expenses of working people. Retired Americans tend to have different expenses than those who are still in the workforce. A different index, the CPI-E, measures prices of goods and services that are representative of post-retirement spending. Health care, for example, is weighted more heavily by the CPI-E because older people spend two to three times as much on health care as younger consumers. Housing costs are also given more weight by the CPI-E.
Some senior advocates have recommended that the CPI-E should be used to calculate Social Security COLAs. Whether seniors would always benefit from that change is not clear. From 1982 to 2014, the average annual increase for the CPI-E was 2.9%, compared to 2.7% for the CPI-W. In the long run, using the CPI-E might put more money into the pockets of Social Security recipients.
On the other hand, the 2022 benefit increase would have been 1.1% lower if it had been based on the CPI-E rather than the CPI-W. Gasoline and food prices have grown at a disproportionately high rate in the past two years, and those expense categories are given more weight by the CPI-W.
Over time, older people have lost buying power because COLAs are small or nonexistent in years when medical expenses increase while most other prices hold steady. Senior Citizens League recommends a minimum 3% COLA every year, regardless of inflation. Policy makers should consider whether that suggestion, or adopting a better measure of senior buying power, should be implemented to protect the buying power of seniors who depend on Social Security for their income.