As inflation spikes, Social Security cost-of-living bump could reach 10.5%, report says
Senior citizens and others who rely on Social Security payments will likely receive a big cost-of-living adjustment (COLA) in early 2023, given that the annual hike is based on inflation. But the question is: How big of a boost, and will it actually offset an inflation rate that just reached a fresh 40-year high?
Consumer prices in June surged 9.1% over the past 12 months — exceeding the forecast from economists for an 8.8% increase. The price hikes were broad-based: Gasoline, food, rent and medical care all rose in June, the government report said on Wednesday.
Because of June's higher-than-expected jump, it's likely seniors will receive a 10.5% adjustment to their Social Security checks in early 2023, the Senior Citizens League, an advocacy group for older Americans, said on Wednesday.
That compares with their earlier forecast for a COLA increase of 8.6%, based on May inflation data.
An increase of 10.5% would increase the average retiree benefit by $175.10, according to Mary Johnson, Social Security and Medicare policy analyst at the Senior Citizens League. This year, the average monthly Social Security check is about $1,658, which means a COLA increase of 10.5% would bring the average monthly payment to $1,833.10 early next year.
That could provide some relief to seniors, with many struggling with costs that are spiking higher than 5.9% cost-of-living adjustment they received at the start of 2022. That bump has so far trailed the actual rate of inflation this year, which has ranged from 7.%% in January to the fresh 40-year high of 9.1% in June.
"A high COLA will be eagerly anticipated to address an ongoing shortfall in benefits that Social Security beneficiaries are experiencing in 2022 because inflation is higher than their 5.9% COLA," Johnson said in an email to CBS MoneyWatch.
What do the experts say about the 2023 COLA?
At the moment, there are multiple forecasts for the next annual Social Security cost-of-living adjustment, but the experts all agree on one thing: The next COLA will likely be the biggest since 1981, when seniors received a bump of 11.2%.
The COLA hike could reach 10.8% if inflation continues at its current pace, according to a June report from the non-partisan Committee for a Responsible Federal Budget that was released prior to the most recent inflation data.
If inflation continues to run hot, or higher than the recent average, the COLA could reach 11.4%, the Senior Citizens League said on Wednesday. If inflation drops down below the recent average, seniors may see an increase of 9.8% — lower than forecast, but still marking the highest adjustment since 1981.
When will Social Security announce the new COLA?
Right now, analysts are basing their forecasts on the most recent inflation data — but the actual COLA adjustment won't be known until the Social Security Administration makes its official announcement, which typically occurs in October.
The agency will base that decision on the previous three months of inflation data. That means the Social Security Administration will be analyzing inflation from July, August and September to set the hike — and thus the actual payment increase could vary from the current forecasts, which are based on inflation data through June.
How is the COLA calculated?
The Social Security Administration bases its cost-of-living adjustment on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), a basket of goods and services typically bought by workers.
Advocates for senior citizens say that this index doesn't accurately reflect the spending patterns of retirees, given that they tend to have higher healthcare costs than younger workers.
Will Medicare premiums eat into the COLA increase?
Many seniors got walloped in 2022 when the 5.9% cost-of-living adjustment failed to match inflation — and then got hit again due to a 14.5% premium hike for Medicare's Part B.
The reason for the big Medicare hike in Part B was because of the plan's coverage of the costly controversial Alzheimer's drug Aduhelm.
In 2022, the Medicare premium increased $21.60 to $170.10 per month. Because that payment is deducted from seniors' Social Security checks, many seniors saw much of their Social Security cost-of-living increase eaten up by the Medicare hike.
But there's a glimmer of hope for seniors in 2023: The government recently said that Medicare B premiums should be "adjusted downward to account for an overestimate in costs attributable to the inclusion of new Alzheimer's drug Aduhelm." That announcement came after Medicare said it would restrict use of Aduhelm, as well as a price cut from the drug's manufacturer.
There are other costs and adjustments that go into the calculation of the Medicare Part B premium, noted Corey Metzman, COO and co-founder of Chapter, a company that advises seniors on Medicare plans.
But, he added, "it's very safe to assume is that the increase will be among the most moderate we've seen in the last 15 years."