Who’s ready for a $145 per month increase in Social Security benefits? | personal finance

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Whether you realize it or not, you’ll likely depend, at least to some extent, on Social Security income when you retire.

Last month, the national pollster Gallup surveyed currently retired and non-retired workers to get a sense of how important Social Security income is, or is expected to be, in their golden years. According to the results, 89% of current retirees rely on their Social Security income to some varying degree to make ends meet, while a combined 84% of non-retirees anticipate it will be a “major” or “minor” during retirement. .

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Considering the importance of Social Security to the financial well-being of tens of millions of retired beneficiaries, it’s perhaps no surprise that the annual cost-of-living adjustment (COLA) is the most anticipated announcement of the entire year.

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What is Social Security’s Cost of Living Adjustment (COLA)?

Think of Social Security’s COLA as a “raise,” but not a traditional one designed to help people get ahead. Rather, the Social Security COLA is a way to ensure that program beneficiaries receive increased payments to keep up with rising prices for goods and services (ie, inflation).

Before 1975, these benefit increases were arbitrarily awarded in special sessions of Congress. Since then, the Consumer Price Index for Urban Salaried and White-collar Workers (CPI-W) has served as the program’s inflationary tether. The CPI-W has eight main expense categories, as well as dozens and dozens of subcategories, each of which has its own percentage weight. These weights are what allow us to clearly and concisely describe whether prices are rising or falling with a single CPI-W reading.

Interestingly, the Social Security COLA is only determined by the CPI-W readings from the third quarter (July to September). Although the CPI-W readings for the other nine months are not used in the COLA calculation, they can still be useful in identifying inflationary or deflationary trends.

Without getting too complicated, if the current year’s third quarter (Q3) average CPI-W reading is higher than the previous year’s Q3 average CPI-W reading, inflation has occurred and beneficiaries will receive a “raise “. “The benefit increase amount is simply the year-over-year percentage increase in average CPI-W readings, rounded to the nearest tenth of a percent. Very clear.

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Who is ready for the biggest nominal dollar profit increase in history?

What is not simple is what is happening on the inflation front right now. In April, the US Bureau of Labor Statistics reported that the inflation rate for the past 12 months reached 8.3%. This was actually lower than the 8.5% inflation rate reported in March, which marked a 40-year high.

If you’re wondering why inflation is soaring, the answer lies in a couple of factors. For starters, the nation’s central bank stepped on the gas for too long, resulting in historically low interest rates and a bond-buying program (known as quantitative easing) that was designed to drive down Treasury yields. long-term to encourage loan.

We have also witnessed the rise in commodity prices in the wake of the COVID-19 pandemic and following Russia’s invasion of Ukraine. Supply chains are broken in many industries around the world, with no immediate relief in sight of crude oil or natural gas supply.

For Social Security recipients, it means one thing: A huge monthly benefit increase is on the horizon.

According to a report recently released by the nonpartisan senior advocacy group, The Senior Citizens League (TSCL), the COLA for next year could hit 8.6%. On a percentage basis, it would be the largest year-over-year profit increase in 41 years. But in nominal dollars, it would represent the largest “rise” in history.

In April 2022, the average retired worker took home $1,666.49 per month. By the end of the year, I estimate this average payment, which grows by about $2 each month as new retirees enter the benefits bracket, will increase to about $1,683. A COLA of 8.6% on this amount would result in an increase of approximately $145 per month in benefits for retired workers to $1,828 by January 2023.

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A dollar from Social Security is not what it used to be

On the surface, an average benefit increase of $145 per month for retired beneficiaries would probably get people excited. But the unfortunate truth is that the inflation faced by seniors has far exceeded the COLAs they have received over the last 22 years.

Mary Johnson, Social Security Policy Analyst at TSCL, compared the cumulative COLAs that have been awarded to seniors since 2000 with the COLAs that would have been needed to keep pace with inflation since the turn of the century. While COLAs have cumulatively increased 64% since 2000, typical expenses for seniors have grown 130%. Based on Social Security’s average monthly benefit of $816 per month in 2000, today’s seniors have fallen short by nearly $540 per month for the past 22 years. That’s about $6,500 a year in lost purchasing power.

The purchasing power of Social Security income has plummeted 40% since the turn of the century for one key reason: The CPI-W does a poor job of accounting for the inflation facing retired workers.

As its full name indicates, it is an index aimed at urban salaried and administrative workers. These are typically working-age Americans who spend their money differently than senior citizens. As a result, the CPI-W tends to underestimate critical spending categories for older Americans, such as health care and housing, while giving more credence to less important spending, such as transportation, education, and clothing.

The real kick in the pants is that legislators on Capitol Hill agree that CPI-W is flawed, they just can’t agree on how to fix it. Both Democrats and Republicans have proposals they believe would be an improvement, but neither party has been willing to give an inch to find common ground with their opponent.

Even with the largest nominal dollar benefit increase in history likely by 2023, retired workers unfortunately have little to celebrate.

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