Retirees could see a double-digit percentage increase in their Social Security benefits next year as inflation continues to run hot, according to several new estimates.
Based on new inflation data through June, the cost-of-living adjustment for Social Security benefits, or COLA, could be an increase of 10.5% next year, according to estimates from the Senior Citizens League, boosting the average retiree benefit by $175.10 every month.
The nonprofit Committee for a Responsible Federal Budget (CRFB) puts that increase at 11.4% if inflation keeps trucking along as it currently is. And even if inflation cools, the CRFB estimates a 9% COLA, while the Senior Citizens League forecasts 9.8%.
“Holy COLY,” Marc Goldwein, CRFP’s senior vice president and senior policy director, told Yahoo Money. “That would be the highest COLA bump in four decades. This is very rare.”
But it’s not all roses.
The hike doesn’t kick in until next year even as prices rise now. The higher benefit could also increase the tax burden and reduce government benefits for lower-income retirees. And it complicates the outlook for Social Security for everyone else.
In June, the annual report released from the trustees of the Social Security and Medicare programs projected a 3.8% COLA increase for next year. They then bumped that up in a briefing hosted by the Bipartisan Policy Center saying it could be closer to 8%.
Then came the Consumer Price Index for All Urban Consumers (CPI-U) the U.S. Bureau of Labor Statistics reported this week, showing that prices increased 9.1% over the last 12 months.
What’s more is that the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) — which the Social Security Administration (SSA) uses to calculate COLA — ran even hotter. It increased 9.8% over the last 12 months. The SSA uses the average CPI-W consumer price index for July, August and September of 2022 over the previous year’s third quarter.
“We don't have inflation for those months yet, but if inflation accelerates, more likely than not, we're talking about a double-digit COLA or very close to a double-digit COLA,” Goldwein said. “It’s crazy.”
When it kicks in
For the roughly 70 million retired senior citizens and disabled workers who are seeing rising prices eroding the buying power of their Social Security benefits, a fatter check is promising. However, the final COLA won’t be announced until October and would not kick in until checks arrive in January.
That’s a long time to wait for an increase to cover rising prices now. Already, Social Security beneficiaries got a 5.9% monthly raise for this year’s COLA increase, which bumped the average monthly retirement benefit of $1,565 in 2021 to roughly $1,657, or about $92 extra a month.
But that’s been eaten up.
“In June, chicken increased 20.4%, up more than ground beef (up 9.7%), or bacon (up 10.8%),” Mary Johnson, a Social Security policy analyst for The Senior Citizens League, told Yahoo Money. “Eggs were up 33%. Even dried beans are up 9.9%. Until food prices start coming down, the lower- and moderate-income consumers will be treated with ongoing financial insecurity.”
Meantime, the COLA doesn’t take into account increases in the Medicare Part B premium. In 2022, Part B increased 14.5%, one of the highest jumps in the program's history. The Part B premium is automatically deducted from Social Security checks.
For many retirees Social Security is a major part of their income. Nearly 9 out of 10 people aged 65 and older receive a Social Security benefit, according to the SSA. Moreover, Social Security benefits represent about 30% of the income of the elderly. Among elderly Social Security beneficiaries, 12% of men and 15% of women rely on Social Security for 90% or more of their income.
“We can all agree that we’re in for a rocky ride for the coming months,” Johnson said.
A bigger Social Security benefit translates to higher income, which can mean higher taxes for those with incomes above $25,000 for individuals and $32,000 for married couples, according to Johnson. Tens of thousands of retirees who have not paid taxes on their benefits in the past may discover they must start doing so in 2023.
“Because the income thresholds are not adjusted like ordinary tax brackets, these once-in-a-lifetime COLA increases could lead to permanently higher taxes for many retirees,” Johnson said.
Higher income can also result in cuts in income-related benefits for low-income seniors, Johnson said. A May-June survey from the Senior Citizens League found that 39% of participants who receive low-income benefits reported their low-income assistance was reduced due to this year’s 5.9% COLA, while 15% reported they lost access to at least one assistance program.
“The most cruel irony is that a high COLA can lead to trims in income-related benefits such as SNAP and rental assistance for low-income beneficiaries,” Johnson said.
Future of Social Security
Malte Mueller via Getty Images
Finally, another troubling question is how the ballooning benefit checks could impact the main Social Security trust fund. It’s forecast to continue paying out full benefits through 2034 at which point it can only pay out 77% of scheduled benefits, according to the annual report from the trustees of the programs.
The concern is that bigger Social Security benefit checks now speed up the timeframe for the dissipation of the trust fund’s reserves.
A theory floated by economists is that with higher inflation comes higher wages, which means workers currently paying into the program will ramp up Social Security contributions to balance it out.
However, that’s not a slam-dunk solution. A new survey of 1,150 HR professionals from May 10 to May 24, 2022 from the Society for Human Resource Management (SHRM) Research Institute, found that more than half of the participants surveyed are either not considering inflation (26%) or are not sure if inflation will be factored into annual pay raises (29%).
“A lot of companies are giving midyear raises, which wouldn't have started until just now,” Goldwein said. “We’re going to learn more at the end of the year, if there are bigger ending-year raises, but the announcements I’ve seen have suggested that people aren't doing 9% raises.”
Kerry is a Senior Columnist and Senior Reporter at Yahoo Money. Follow her on Twitter @kerryhannon