Social Security payments are expected to increase dramatically; here’s what you need to know

NEW YORK (AP) — Tens of millions of older Americans are about to get what could be the biggest raise of their lives.

On Thursday, the US government is expected to announce the size of the percentage increase Social Security recipients will see in monthly payments this coming year. It’s virtually certain to be the biggest in four decades. It’s all part of an annual ritual where Washington adjusts Social Security benefits to keep up with inflation, or at least with a close measure of it.

Much controversy accompanies the move, known as the cost of living adjustment or COLA. Critics say the data the government is using to set the increase does not reflect what older Americans are actually spending, and therefore the inflation they are actually feeling. The increase is also one-time, meaning recipients get the same increase regardless of where they live or how big their nest egg is.

Here’s an overview of what’s going on:

What is the problem ?

The US government is about to announce an increase in the amount that the more than 65 million Social Security recipients will receive each month. Some estimates indicate that the increase could reach 9%.

What must beneficiaries do to obtain it?


Will this be the biggest increase ever?

No, but it’s probably the heaviest in 40 years, which is longer than the vast majority of Social Security recipients have received payments. In 1981, the increase was 11.2%.

When will the biggest payments start?

January. They are also permanent and compound. This means that the next year’s percentage increase, whatever it is, will be added to the new larger payment that recipients will receive after that most recent increase.

What was the increase last year?

5.9%, which was itself the highest in nearly four decades.

What is the typical increase?

Since 2000, it has averaged 2.3%, with inflation remaining remarkably well under control through all sorts of economic fluctuations. During some of the most difficult years of this period, the biggest worry for the economy was actually that inflation was too low.

Since the 2008 financial crisis, the US government has announced three times a zero increase in Social Security benefits due to low inflation.

Is the increase therefore intended to compensate for inflation?

This is the intention. As Americans have become painfully aware over the past year, every dollar doesn’t go as far in groceries as it used to.

Has Social Security always given such raises?

No. The first American to receive a monthly Social Security retirement check, Ida May Fuller of Ludlow, Vermont, received the same $22.54 monthly benefit for 10 years.

Automatic annual cost-of-living adjustments did not begin for Social Security until 1975, after a law passed in 1972 requiring them.

What is the size of the augmentation set?

It is linked to a measure of inflation called the CPI-W index, which tracks the types of prices paid by urban wage earners and office workers.

Specifically, the increase is based on the increase in CPI-W from summer to summer.

Is this the measure of inflation that everyone follows?

No. People usually pay more attention to a much broader measure of inflation, the CPI-U index, which covers all urban consumers. This covers 93% of the total US population.

The CPI-W, on the other hand, only covers about 29% of the US population. It has been around longer than the CPI-U, which the government only started compiling after legislation that required annual Social Security increases to be linked to inflation.

Is it weird?

Yes, and some critics have argued for years that Social Security should move to a different measure, one that relates to seniors in particular.

Another experimental index, called CPI-E, is supposed to offer a better reflection of how Americans aged 62 and older spend their money. It has historically shown higher inflation rates for older Americans than the CPI-U or CPI-W, but it hasn’t taken hold. Nor are other measures compiled by organizations outside government that hope to show how inflation specifically affects older Americans.

Recently, the CPI-E has shown somewhat softer inflation than the CPI-W or CPI-U.

Why not use one of these other indexes?

To calculate the CPI-E, the government draws from the same survey data used to measure the broader CPI-U. But there are relatively few older households in this dataset, which means it may not be the most accurate.

All indices only give a rough approximation of what inflation really is. But the more pressing challenge may be that if the government switched to a different index, one that showed higher inflation for older Americans, Social Security would have to pay higher benefits.

That, in turn, would mean a faster drain on the Social Security trust fund, which appears to be draining in just over a decade at its current rate.

How is the amount of Social Security benefits determined?

Through a complicated formula that takes into account several factors, including a worker’s income during their 35 highest earning years. Generally, those who have earned more money and those who wait longer to start receiving Social Security get larger benefits, up to a point.

This year, the maximum benefit allowed for someone who retired at full retirement age is $3,345 per month.

Will the wealthy get the same social security boost?

Yes. Everyone gets the same percentage increase, whether they have millions of dollars in retirement savings or are just getting by.

If the increase is based on inflation in urban areas, will people in rural areas get the same boost?


“COLA doesn’t take into account where you live or your actual spending habits,” said William Arnone, CEO of the National Academy of Social Insurance. “To some people, that’s an overstatement of the cost of living for, say, small towns in the Midwest compared to urban areas like New York, DC, or Chicago. Since many seniors choose to live in suburban or rural areas, some will benefit more than others from an increase of the same magnitude.

Is the raise bad news for anyone?

This is great news for each recipient and for the businesses around them who may see more sales.

But it also means the Social Security system is paying out more, which can add more strain to its trust fund.

A year of steep inflation-driven increases won’t drain the system per se, but it’s been heading for an unsustainable future for a long time. The latest annual report from Social Security Trustees said its trust funds that pay out retirement, survivors, and disability benefits will be able to pay scheduled benefits on a timely basis until 2035. After that, the money from taxes will be enough to pay 80% of scheduled benefits.

Will this make inflation worse?

This will put more money in people’s hands who really need it, and they are very likely to use it. This will further fuel the economy, which could keep upward pressure on inflation.

The Social Security boost, however, will have less of an impact on the economy than previous stimulus packages provided by Washington, grunts in supply chains caused by global business shutdowns or other factors. which economists say are behind the worst inflation in decades.

So everything is going terribly?

The risk of a recession appears to be growing daily, but many economists expect inflation to decline as interest rate hikes take effect and supply chains continue to tighten. to improve.

Economists at Deutsche Bank, for example, expect inflation to rise from 8.2% last August to 7.2% in the last three months of this year. In 2023, they see it drop to 3.9% in the second half.

This is essential for many Social Security recipients. This would mean that the COLA they receive this coming year would be greater than the inflation they are feeling right now. This would help make up for the past year, where actual inflation has far exceeded the cost of living increase they achieved in January 2022.

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