Social Security payments will increase by an average of $140 per check as the national pension plan is set to receive its biggest cost-of-living adjustment (COLA) in 40 years.
The hike came in at 8.7 percent, an attempt to close the gap caused by inflation that reached as high as 9.1 percent in June before tapering off slightly over the summer. Between 2010 and 2020, Social Security COLAs averaged just 1.7 percent.
Social Security is adjusted in the third fiscal quarter every year and is the primary source of income for most of America’s seniors, according to the agency. In June, nearly 50 million retired workers and their families received more than $80 billion, with the average monthly benefit totaling $1,670.
Many disabled workers are also supported by Social Security. In June, they received more than $10 billion for an average payment of $1,362.
In total, the program pays out more than a trillion dollars each year from a dedicated payroll tax, making up 17 percent of the national budget in 2021, according to the Treasury Department.
More than 70 million Social Security beneficiaries will be affected by the adjustment, which will go into effect over December and January.
Here are five takeaways from Thursday’s COLA.
The COLA allows recipients to break even
While an additional $140 per month is a sizable increase for people who receive a Social Security check, the extra money is really just a break-even number to offset the cost of high inflation.
The consumer price index report released Thursday showed annual inflation increased 8.2 percent, remaining near 40-year highs and showing little sign of slowing down.
While energy prices slackened by 2.1 percent in September, they’re still 19.8 percent higher than they were last year. Prices for food are also continuing to increase, up 0.8 percent on the month and 11.2 percent on the year.
Consumer inflation has been above 8 percent since March, eating into paychecks and diminishing the value of Social Security payments. So while the 8.7 percent COLA will come as a relief to seniors, it will only normalize their standard of living back to where it was a year ago rather than giving them surplus income.
“This is not a benefit increase, it’s an adjustment to keep pace with inflation, and of course prices are rising to very high levels right now,” Nancy Altman, a Social Security advocate and co-director of the nonprofit organization Social Security Works, said in an interview. “But the COLA is an extremely important feature, because without it benefits would erode over time.”
The COLA is especially important amid stock market declines
Many seniors receive benefits from private pension plans such as 401(k)s that are widely invested across the stock market in addition to Social Security.
The stock market has been performing poorly lately due to interest rate hikes by the Federal Reserve that are intended to cool inflation, so the performance of many broad-based investment vehicles has been diminishing.
This makes the COLA, which is a monetary modification that’s independent of market performance, especially powerful by comparison.
“The whole concept of a COLA is a big deal,” Altman said. “It often gets ignored because there’s normally just a small cost-of-living increase, or sometimes there’s none. But if inflation goes up 20 percent, you get a 20 percent increase. It’s not capped, and that’s an important concept, especially now.”
Since the Fed started raising interest rates back in March, the big stock indices have seen major declines, falling more than 20 percent into bear market territory and taking many retirement plans with them.
The Dow Jones Industrial Average is down 7,781 points, 21.51 percent, since the beginning of the year. The S&P 500 is down 26.62 percent and the technology-heavy Nasdaq index, whose companies tend to carry a lot of debt and so are particularly susceptible to interest rate hikes, has fallen more than 35.43 percent.
Medicare premiums are decreasing
Thursday’s COLA announcement follows a drop in the price of the premium for Medicare Part B, which covers hospital and doctor visits — another boon for seniors, though a smaller one.
In September, Medicare determined that the Part B premium would be 3 percent lower in 2023, dropping to $164.90 from $170.10 in 2022. Those payments are usually taken directly out of Social Security checks, so that could mean an additional $5 dollars a month on average for seniors on top of the $140 COLA boost.
Part B deductibles will also drop to $226 in 2023, a decrease of $7 from the annual deductible of $233 in 2022.
These changes are especially significant for people who don’t have much income, since their Social Security payments can often be eaten up by their Medicare premiums as part of the same effective payment.
But the rising COLA together with the falling premium means that people on the lower end of the income spectrum could feel a significant increase in monthly payments beginning in 2023.
The COLA will help more people than just retirees
Millions of children in the U.S. with retired or deceased parents also receive Social Security benefits each month.
“Each month during 2021, we paid an average of $2.8 billion in benefits to 4 million children whose parents (one or both) were retired, deceased, or were disabled,” the Social Security Administration said in a statement back in June.
And that number excludes children who are taken care of by grandparents receiving Social Security benefits. As many as 2.5 million grandparents in the U.S. have the primary responsibility of caring for grandchildren, according to research from North Dakota State University.
“Economic hardship in the U.S. and recent social challenges have contributed to the increase in multiple-family generations living together to save costs and share resources,” a 2021 report from the university found.
Grandparents living in multigenerational homes are “quite common” and are often “providing help with financial difficulties and working to provide basic needs and save economic resources,” the report found.
Congress considering inflation measurement specifically for seniors
The COLA is based on a measure of inflation called the CPI-W, which measures the spending habits of urban wage earners and clerical workers. Accordingly, experts refer to the COLA as wage-indexed.
The Labor Department also measures the spending habits of seniors in a metric known as the CPI-E — “E” for elderly — but the Social Security Administration doesn’t use that number to figure out by how much it should adjust its checks.
Congress would need to authorize the use of the CPI-E for the COLA, which could affect how much seniors pay on important expenses like prescription drugs.
Rep. John Larson (D-Conn.) has one such proposal, which he says would “help seniors who spend a greater portion of their income on health care and other necessities.”
In a Thursday statement released along with the COLA, Larson touted his legislation, encouraging the “new measure of inflation that takes into account actual expenses incurred by seniors.”