Mary Johnson, Social Security and Medicare policy analyst for the Senior Citizens League, said August consumer price data shows a “weakness in (the) inflation adjustment system” used to determine the increase. The latest COLA increase estimate is 8.7%, almost a full percentage point from the 9.6% the League predicted last month. That reflects a significant drop in the Consumer Price Index, or CPI-W, the index that Social Security benefits are based on. It has decreased even more, by 1.10 percentage point year-over-year to 8.7%. And it’s the second straight month CPI-W has decreased. This change was driven by a drop in gasoline prices, along with flaws in the way the increase is calculated. According to Johnson, “One of the biggest issues in using the CPI-W to calculate the Social Security COLA is the fact that it does not track the spending of retired households age 62 and up and gives greater weight to gasoline and transportation costs. A significant drop-in gasoline prices played an outsized role in why my COLA estimate has dropped”. Overall, however, retired and disabled Social Security recipients spend more of their income on healthcare, housing and food and less on gasoline, meaning the CPI-W may not adequately reflect senior spending and needs. Now here’s where it gets interesting. Take a look at the chart below, which represents US inflation rates since 1980.
If you notice to the right, since 2020, we’ve had a massive spike in inflation that has consistently risen for the past 2 years. Doesn’t it sound strange to you, that the way that your payment calculation is made, since we had a sudden drop in inflation these past few months, we’ve seen core inflation finally go down. But wait a minute… what about the 2 years of sharply rising inflation we’ve had. Why are we comparing third quarter inflation data at a time when inflation was slowing down, with last year’s third quarter inflation data, which was sharply rising at the time. So that means we’re showing on paper, that inflation has overall gone down for seniors. Because just for a short moment, we had a decline in inflation as gas prices started to ease, from $6 a gallon down to $5.
Therefore, Social Security beneficiaries end up with less money in their checks next year? Than if inflation in third quarter of this year had shown a massive spike in inflation, compared with last year? As it has been for the last 2 years consistently? It’s not fair to seniors. It’s not right. Folks, the COLA calculation is innately flawed, and something needs to change. The COLA needs to be calculated in which inflation over the entire year is compared with inflation over the previous entire year. Not during one quarter, in a small 3 month window in which rates can be artificially inflated or deflated, according to what conveniently provides less to seniors wallets. For most retirees, Social Security is a financial lifeline they simply couldn't do without.
When national pollster Gallup surveyed retirees earlier this year, it found that just shy of 90% of beneficiaries needed their Social Security income to make ends meet. Given the importance of Social Security to the financial well-being of our nation's seniors, there's no announcement more anticipated than the annual cost-of-living adjustment (COLA). This-year's announcement will come on October 13th, 2022 at 8:30 a.m. ET. While the 2023 COLA offers plenty of promise on the surface, it becomes more of a good news/bad news scenario when you really dig into it.