Inflation has been raging for more than a year, pushing up prices on everything from steak to gasoline. For retirees worried about paying soaring bills, a big question is whether their Social Security benefits will be able to keep up with inflation.
The short answer: Probably. Social Security’s annual cost-of-living adjustment (COLA) has kept up well with inflation the past 20 years, according to the Center for Retirement Research at Boston College. But despite the 5.9 percent COLA that went into effect in January, the biggest in four decades, many beneficiaries have still lost buying power to this year’s inflation burst, thanks in part to the large increase in Medicare Part B premiums.
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Annual adjustments
When the first Social Security check was issued in 1940, the payments were fixed: The amount of your benefit didn’t change from year to year unless Congress authorized a raise. In 1973, however, the Organization of Petroleum Exporters (OPEC) declared an oil embargo on the United States and other countries, which sent gas prices through the roof and touched off a spike in inflation. The Consumer Price Index (CPI), the government’s main gauge of inflation, rose 6.2 percent in 1973 and 11.1 percent in 1974, sharply reducing the buying power of a Social Security payment. In response, Congress authorized automatic COLAs, which adjust Social Security benefits for inflation each year. The first automatic COLA, in 1975, was 8 percent.
The formula for calculating the COLA is based on a subset of the main CPI called the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which measures the price changes in a basket of goods. The Social Security Administration (SSA) looks at the average CPI-W level from July through September of the previous year and the average CPI-W for the same span in the current year. The percentage change between the two averages is the COLA that kicks in the following year.
Until recently, inflation has been tame. COLAs averaged 2.1 percent from 2001 through 2021. There was no COLA at all in 2009, 2010 and 2015 because inflation levels didn’t increase year over year. But by the spring of 2021, inflation had begun to resurface, and SSA announced a 5.9 percent COLA for benefits paid in 2022. It was the largest COLA since 1982’s 7.4 percent increase. The 2023 COLA could be even larger. “A rough guesstimate now might be around 8 percent,” says Stephen Goss, chief actuary for SSA. “It could be a percentage point or two higher or lower than that.”
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