70 Million Americans (roughly 20% of our population) will be getting a raise in their social security checks in January 2023. The Cost of Living Adjustment (“COLA”) will be 8.7%, the largest in 4 decades. When Social Security was first enacted in 1940, the average monthly payment was $24. We’ve come a long way since then- the average amount now is $1,900. Multiply that by 70 million recipients and 12 months a year and you get over a trillion dollars paid out for social security each year. Yet, social security is not only a big deal for retirees, it is also a huge deal for those not yet on social security. Read on.
History. Because there was no provision in the original law for an adjustment based on inflation, payments remained low until 1950. Then, Congress added amendments and an increase of 77%. In 1972, Congress passed new laws that included an automatic benefit increase, based on the increase in consumer prices beginning in 1975. However, that law stipulated that there would be no adjustment if the increase was 3% or less. In 1986 Congress eliminated the 3% trigger. From 1975-1982 the COLA averaged 9% per year, with 1980 at 14.3%. From 2009-2020, the average increase was only 1.5% per year. The increase for 2022 was 5.9% and now it will be 8.7% for 2023.
Calculation. The method of calculating the cost of inflation uses the CPI- W. This is the measure published by the Bureau of Labor Statistics (“BLS”) monthly that represents the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). It includes a number of major spending categories, with shelter costs having the largest weighting. A calculation is made every month and is published two weeks after the end of the month. The Social Security COLA compares the average index for July, August and September from 2021 to the July-September 2022 index. This ratio is the COLA and the final numbers (because they were waiting for September 2022 data) just came out a week ago.
Certain senior groups have been lobbying to change the COLA calculation from the use of CPI-W to CPI-E, where E stands for elderly. This is an experimental index maintained by the BLS. For example, CPI-W gives food and beverages a weight of 16.4% compared with 12.4% for CPI-E. For housing the weights are 39.2% vs. 46.6% and for medical care 5.4% vs. 11.3%. So, you would think that the CPI-E index would have a higher number.
However, the relationship between CPI-W and CPI-E has changed. CPI-E was “only” a 8% rise vs. CPI-W’s 8.7%. And last year, CPI-E was 4.8% vs. CPI-W’s 5.9%. A big difference has been the slowing of medical costs for seniors. In fact, next year, the Medicare Part B base premium, which increased 14% from 2021 to 2022 to $170.10 per month, is actually going down by 3% to $164.90 in 2023. So, those on social security will in fact see an almost 9% increase in their net payments.
Social Security’s importance to Retirees. Just over 40% of Americans age 65 and older rely on social security for more than half of their income. For 20% of Americans age 65 and older, social security represents 90% or more of their income. Social security payments can represent millions of dollars to recipients over their lifetime and therefore should be reviewed carefully and thoughtful strategies put in place to maximize it.
Social Security’s Future. The big COLA number for 2023 will likely have a negative impact on the date of insolvency for the Social Security Trust Fund. This is even with the amount of FICA taxes increasing due to an increase in the maximum amount of taxed wages of workers from $147,000 this year to $160,200 next year. Predictions have been that the trust funds would be insolvent by 2034. Large upcoming COLAs could shorten this time. Once the SSA fund is insolvent, it is projected that it will only be able to pay 80% of expected benefits. As we have pointed out in earlier blogs, without new legislation, the law provides that all social security payments under those conditions would all be cut by the same 20%.
However, Congress could pass a bill to make payments subject to a “means test.” Medicare premiums are handled that way now. Monthly premiums are currently based on the Adjusted Gross Income (“AGI”) of the participants, with individuals having AGI above $500,000 currently paying $578 per month, not $170. The same process could easily be put in place for social security benefits, as the SSA and IRS share data easily and regularly.
Conclusion: Social security payments are important to all Americans of all ages. As the social security trust fund balance continues to shrink, your financial planning needs to include the proper strategy to maximize social security for you over your lifetime. It’s another reason why you should be working with a total wealth manager like DWM, who is knowledgeable and experienced in these matters and can help you review the options and identify the best courses of action for the future. Please call or email if you need assistance.