While analysts earlier this summer had forecast a nearly double-digit percentage increase in monthly Social Security benefits next year, it appears that retirees will have to settle for a bit less.
While inflation in August did not cool as much as expected – with the Consumer Price Index up 8.3% over the last 12 months compared with 8.5% in July — the measure that the Social Security Administration (SSA) uses to calculate the cost-of-living adjustment, or COLA, fell even more.
The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) increased 8.7% year over year in August, down from 9.1% in July. As a result, the Social Security cost-of-living adjustment (COLA) for 2023 will likely be an increase of 8.7%, according to estimates from the Senior Citizens League. That’s down from 9.6% to 10% that analysts estimated in August.
“This month was bad news for inflation because we saw core prices were very hot, but it's also bad news for COLAs because the CPI-W went down,” Marc Goldwein, senior vice president and senior policy director at the nonprofit Committee for a Responsible Federal Budget, told Yahoo Money. “Gas prices are weighted more heavily in the CPI-W relative to the other measures and that's probably what's driving it down.”
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The final COLA is calculated by averaging together the CPI-W consumer price index for the third quarter of the year – July, August, and September of 2022 – and then comparing that figure with the same data last year. The Social Security Administration is expected to announce the COLA on October 13 after the release of the September consumer price index data.
An 8.7% bump still is uncommon and would be the largest since 1981, when the COLA was 11.2%. A COLA of 8.7% would ramp up the average retiree benefit of $1,656 by $144.10 per month.
Other experts are in line with this forecast.
“We now expect the COLA for next year will probably be closer to 9%, maybe even 8.5%, depending on what happens next month,” Goldwein said.
For the roughly 70 million retired senior citizens and disabled workers who have struggled with escalating prices for everything from electric and natural gas bills to groceries and monthly rent, that potential boost in their monthly checks next year would be welcome.
“Even though the rate of inflation has come down over the past two months, we can’t say that inflation is done with us yet,” Mary Johnson, a Social Security policy analyst for The Senior Citizens League, told Yahoo Money. “We don’t know yet if this pattern of ‘deflation’ will continue. Right now, gasoline prices are down in large part due to a temporary 90-day lifting of the federal gasoline tax. That is due to end in September. We’re watching gas and home heating oil prices in October. This pattern of inflation dropping in the third quarter happened last year as well, but inflation returned worse than ever in October of last year and stayed with us until June.”
While a bigger monthly benefit is good news on the surface, for some retirees it poses concern. An increase in the monthly benefit may result in bigger tax bills. According to preliminary results from The Senior Citizens League’s 2022 Retirement Survey, about 59% of survey participants believe they could be at risk of higher tax liability for 2022 due to the 5.9% COLA increase they received this year.
In addition, 21% of survey participants say that until 2022, their household income was below the income thresholds that can make up to 85% of Social Security benefits subject to federal income taxes. That group worries they will pay tax on a portion of their Social Security benefits for the first time in the coming tax season.
A COLA increase of 8.7% would present similar ongoing increased tax liabilities for next year.
“We don't really have to crystal ball that much now about the possible COLA increase,” Goldwein said. “That’s because there's only one month left of data. So, barring 5% deflation or something crazy like that we pretty much know that there's really no way it could be less than 8% or more than 10%.”
Kerry is a Senior Columnist and Senior Reporter at Yahoo Money. Follow her on Twitter @kerryhannon