The Social Security COLA will ease the sting of inflation
By Tara Siegel Bernard
About 70 million Americans collecting Social Security will receive an 8.7% bump in their benefits next year, the largest raise since 1981, according to the Social Security Administration. That will provide some measure of relief to retirees struggling with soaring prices on everyday necessities, from groceries to housing.
Prices have remained stubbornly high over the past year, even as federal policymakers have taken aggressive measures to rein them in. Social Security is designed to keep pace with inflation through its cost-of-living adjustment, or COLA, which is calculated annually. Starting in January, the increase will lift the typical monthly retiree benefit by $140 to $1,827. That follows a 5.9% increase for 2022, another four-decade high at the time.
“That is breathing room,” said Gloria Hinojos, 75, a retiree in Hacienda Heights, California, who stands to receive roughly $182 more each month, and relies largely on her benefit check to cover her monthly expenses. That includes rent of roughly $1,200 to $1,350 each month, which pays for the land her mobile home sits on, and includes utilities.
The increase — which will help about 52.5 million people 65 and older and 12 million people with disabilities, among others — is based on the Labor Department’s latest report on the consumer price index, released Thursday, which said that prices increased 8.2% in the year through September.
The coronavirus pandemic created conditions that led to the fastest pace of inflation in decades. Disruptions in the supply chain emerged just as consumers, flush with stimulus payments, were demanding more goods, leading to price increases. That dynamic worsened earlier this year when Russia invaded Ukraine, pushing up the cost of fuel and food.
Sustained price increases are particularly painful for retirees, many of whom rely on Social Security for a significant share of their household income.
For Ted Padgett, 81, and his wife, Barbara, 78, it’s their only source of income. Both worked at a furniture manufacturer near their home in Galax, Virginia, for decades. Ted Padgett said he assembled furniture and did maintenance work, while she worked on the furniture’s final touches, such as spraying on finishes.
Together, their checks amount to roughly $1,900 a month. But after paying for Medicare, their supplemental health coverage and rent, there’s only about $700 left to cover groceries and everything else. Two months ago, the couple started to visit a food bank. The couple also hunts for deer, which provides many meals during the winter months, from tenderloin to burgers.
“It’s rough,” Padgett said. “We used to go and buy what you needed and it would be maybe $60. Now, you go buy the same thing and it would be $140. It really went up.”
Many retirees depend almost entirely on Social Security checks. But even retired households 65 and older who are squarely in the middle of the income distribution, with an average annual income of about $41,000, relied on Social Security for a little more than half their income in 2019, according to calculations by the Center for Retirement Research, using data from the Survey of Consumer Finances that year. (Other analyses found that people may be less reliant.)
Social Security also helps lift millions of older Americans above the poverty line, which stood at $12,880 for an individual as of 2021. A greater number of people 65 and older — about 10% — slipped below last year, up from 8.9% in 2020. It was the first increase since 2016, according to the latest U.S. Census Bureau data. One likely culprit: More older people, particularly those with lower incomes, were forced into an early retirement because of the pandemic, experts said.
“A significant increase in the COLA is most welcome, but it doesn’t solve the increase in poverty we saw on the 65-plus numbers,” said Ramsey Alwin, president and chief executive of the National Council on Aging, a nonprofit advocacy group for older adults. “To us, it’s a warning bell. These numbers will increase in the future unless we shore up the programs we need to age well.”
Though the financial health of Social Security improved slightly in 2021 from the previous year thanks to a rebounding economy — when more people are working, the program collects more taxes on wages — it faces a longer-term shortfall. The trust fund that pays retiree benefits will be depleted in 2034, at which time its reserves will run down. When that happens, incoming tax revenue will be enough to cover only 77% of all scheduled benefits. If no action is taken, all benefits will shrink by 23%.
Demographic shifts have led to that imbalance. More baby boomers are collecting payments. Retirees are living longer. At the same time, a declining birthrate has produced fewer workers contributing to payroll taxes — the primary source of Social Security funds. The payroll tax is split between employers and employees, who each paid 6.2% of wages, up to a taxable maximum of $147,000, in 2022. Next year, up to $160,200 of earnings will be subject to these taxes.
There are two ways to close the funding gap: raising payroll taxes or trimming benefits, both of which require congressional approval. But so far, legislators have done little to address the problem.
This year, retirees will also get to keep more of the annual bump to their Social Security check. Last year, Medicare beneficiaries had to absorb a big increase in their premiums, which are deducted from their checks. But this year, for the first time in more than a decade, premiums will decline. The standard monthly premium for Medicare Part B — which covers doctor visits and outpatient hospital services — will be $164.90 in 2023, or $5.20 less than it is this year, according to the Centers for Medicare & Medicaid Services.