Why Social Security Benefit Update Might Squeeze Seniors

Giulia Carbonaro – Newsweek

 

 

 

Senior citizens could be up to receive one of the highest cost-of-living adjustments on record in October —but much will depend on what’s going to happen with inflation in the next three months.

Every year, Social Security benefits are adjusted to the pace of inflation, as per a law that, in 1973, introduced mandatory cost-of-living adjustments (COLAs) aimed at making sure that the buying power of seniors remains the same throughout the ups and downs of the economy.

To calculate whether an adjustment to social benefits is needed, experts compare the average CPI-W (Consumer Price Index for Urban Wage Earners and Clerical Workers) for the third quarter of the current year to that of the previous year, and if there’s an increase, there’s a COLA.

The COLA introduced for this year was 5.9 percent. But since then, inflation has been soaring in the country, to the point that the Federal Reserve has raised interest rates three times this year in an attempt to cool down rising prices.

As inflation is far from cooling down and the Consumer Price Index for all Urban Consumers (CPI-U) has climbed 9.1 percent in June, a new COLA is now expected in October.

The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), the index used to calculate COLAs, has shot up 9.8 percent in the last 12 months, a growth that could mean the COLA this year could be as high as 10.5 percent next year, according to estimates from The Senior Citizens League —a record adjustment for social benefits.

Such an increase would equal $175.10 added to the average monthly retirement benefit of $1,668. It would be the first time since 1982 that the COLA reached double digits after hitting 11.2 percent that year.

But in the coming months, anything could change.

If inflation cools down in the next three months, the COLA could be 9.8 percent, The Senior Citizens League said. If prices continue rising until October, the adjustment to benefit could be even higher than currently predicted by the organization, at 11.4 percent.

But a high COLA might not necessarily help seniors the way it would be expected to.

First of all, as prices rise, higher benefits will only help seniors stay afloat in the current inflation scenario.

Second, those receiving income-related benefits on top of their monthly checks might suddenly see the first reduced as the latter increases, while those with higher incomes might see their taxes increase as a result of the higher social benefits.

“The Senior Citizens League believes 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,” said Mary Johnson, Policy Analyst at The Senior Citizens League, to Yahoo Finance. “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.”

Third, and most importantly, an increase or decrease in the average CPI-W might not even be the best instrument to calculate the buying power and financial circumstances of senior citizens. CPI-W includes gas prices, which are often irrelevant to many senior citizens, as most don’t have jobs to commute to and don’t spend so much on fuel for their cars.

A new bill, called the Protecting and Preserving Social Security Act, was introduced in the Senate this week by Democratic Senator Mazie Hirono of Hawaii that could, among other things, change the way COLAs are calculated to more accurately reflect the costs of senior citizens to include food and beverage, housing, apparel, recreation, education, transportation and medical care.

Seniors spend more than twice on healthcare than younger people, with those aged over 75 spending almost three times as much.

It is unlikely that the bill will be passed by Congress before October.

Why Social Security Benefit Update Might Squeeze Seniors (msn.com)

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