Why Your Social Security Raise Might Be Lower Than Many Think
How large will your Social Security Cost of Living Adjustment (COLA) be for 2023? Some predict the increase will approach 11%. Others say it will be closer to 10%.
But it might be prudent to heed the old adage that you shouldn’t count your chickens until they hatch. Here’s why your Social Security increase might be lower than many think.
The third quarter is the charm
COLAs are intended to help Social Security benefits keep up with inflation. But there are a few details about how the Social Security Administration (SSA) determines the exact amount of COLAs that are important to understand.
First, the SSA does not use the Consumer Price Index (CPI) that you most often hear about in the news. The official name of this measure is the consumer price index for all urban consumers (CPI-U). The SSA, however, uses a different measure known as the Consumer Price Index for Urban Wage and Clerical Workers (CPI-W).
The full names of these two indexes reveal their main difference. The CPI-U tries to track price changes for urban consumers, while the CPI-W tries to track price changes for urban workers. As you’d expect, the metrics tend to scale in parallel but don’t exactly match.
Perhaps the most important thing to know about how COLAs are calculated is that the SSA only uses the average CPI-W figures for the third quarter of the current year and previous years. It doesn’t matter how much inflation might soar earlier in the year. Only Q3 counts.
Signs of a spike
This brings us to why your Social Security increase might not be as high as many think. All forecasts that have been made are based on the inflation we have seen in the United States so far in 2022. But there are signs that inflation has peaked and may decline in the third quarter.
The most obvious indication that inflation has peaked came from the July CPI figures from the Bureau of Labor Statistics (BLS). After increasing steadily month after month, July’s CPI-U remained the same as in June, at 8.5%. July’s CPI-W even fell slightly compared to the previous month.
Gasoline prices fell 7.7% in July. This drop was enough to offset the rise in food and housing prices. So far, this trend appears to be continuing into August. Gas prices in the United States have generally fallen between $0.01 and $0.03 each day since mid-June, according to AAA data. Some experts are now predicting average prices of nearly $3 a gallon could be on the way.
Transport costs are factored into the prices of many products. It is therefore likely that lower gasoline prices could lead to lower prices for food and other goods included in the CPI-W metric.
Real estate prices are also cooling. Higher interest rates have significantly slowed new mortgage lending. Of course, house prices continue to rise. In June, however, house prices rose at the slowest pace since the early 1970s, according to data from mortgage software and analytics company Black Knight.
With all these indications, it seems unlikely that the increase in Social Security for 2023 will be as high as some of the previous projections. However, even if inflation slows in the third quarter, it will not magically disappear.
Realistically, your lowest COLA is likely to be in the 7% to 8% range. The lower end of that range would still be the biggest increase in Social Security in 40 years. The COLA may not be as big as expected, but it will certainly still be huge compared to most years.