If you’re retired or are just entering the work market, the odds are good that you’ll be dependent upon Social Security income during your retirement years. National pollster Gallup interviewed retirees earlier this year, they found that 89% depend in your Social Security payout in some way to pay for their expenses.
Social Security playing such a important financial role for older people is the reason why an annual adjustment to the cost of living (COLA) announcement in this second week in October crucial.
How will Social Security’s cost of living adjustment (COLA) impact you?
The Social Security’s COLA is the mechanism that was designed to ensure that 66 million beneficiaries do not lose their purchasing power due to inflation of services and goods (inflation). If the cost of the products and services that beneficiaries depend on rising by a specific percentage, it’s ideal that their monthly payments increase by the equivalent amount from one year to the following.
Before 1975, COLA had been assigned randomly during special legislative sessions at Capitol Hill (11 times in 35 years). However, the situation has become somewhat more predicable since 1975. For the last 47 years it has become the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) has been Social Security’s inflation-related determinant.
The CPI-W includes greater than half-a-dozen main spending categories as well as a myriad of subcategories, each having distinct weightings. The weights allow the Index be presented as a single figure, which allows for tidy and clean comparisons to the prior month or year , allowing you to swiftly identify the direction in which the prices are heading.
For Social Security to determine its cost-of-living adjustment for the coming year it is necessary to determine the CPI-W reading that was averaged from in the 3rd quarter (Q3) in the year currently underway (only July-September is factored into COLA computation) and then compare it to the CPI-W reading average during the same time period prior to the year. If the current reading is higher than the previous year’s reading it means inflation has occurred and program beneficiaries will receive the benefit of a “raise.” In the context of this the fact that all but three of the previous 47 years have brought about the payment of a COLA for the year following.
The magnitude of the “raise” amounts to the percentage of the increase in Q3 average CPI-W readings over the course of each year until the next, and rounded by a tenth percent. It’s obvious that I’ve placed “raise” in quotation marks. This signifies that COLA is intended to be a match for the inflation rate that is currently in place and will not actually assist beneficiaries beat it.
Social Security benefits are set to be a landmark.
After an entire decade without any changes to the cost of living (save to 2022) retired people are now staring at a historic hike in your Social Security checks in 2023 — and they’ve got an increase in inflation to be grateful for it.
The U.S. inflation rate skyrocketing to a four-decade-high in June, the rising costs of shelter, medical treatment as well as food and energy all play a part in delivering a significantly higher payout for beneficiaries of the program for the coming year.
How much, you might want to know? Based on the announcement by the Social Security Administration, the COLA for 2023 is expected to amount to 8.7 percent. In terms of percentage it’s the highest year-over year increase in the last 41 years. On a nominal basis, the increase next year of Social Security checks will be the highest ever recorded by one mile.
