The Social Security Administration has announced a massive 8.7% increase in Social Security benefits for the year 2023. With inflation at an all time high, this additional money is a big help to retired and disabled Americans.

Social Security is there to help seniors through retirement. That’s why for the upcoming 2023 calendar year, a cost of living adjustment (COLA) has been announced. With inflation data showing that consumer buying power is down, this historic increase in benefits will be a huge boon for those collecting a monthly check from the SSA.

2023 Social Security Increase

A Social Security COLA increase does not have to happen every year, but most years it does, and this year, it’s particularly beneficial. September inflation data is continuing the worrisome trend from the summer and the entirety of 2022. Social Security beneficiaries are feeling the pinch just as much as individuals in the workforce.

The difference is that working individuals may be able to adjust their income by obtaining a raise, changing jobs, or taking a second job. They may have a spouse who can do the same. But what about retirees, collecting the monthly fruit of the Social Security tax they have paid over the years? With fixed incomes, retirees are in somewhat of a vulnerable position. The Social Security increase 2023 announcement provides big relief for recipients of Social Security benefits.

The underlying cause for this Social Security cost of living adjustment is the rampant inflation we have been seeing and experiencing. The outcome of inflation is easy enough to see: car loans, mortgage payments, food, transportation, and medicine have all gotten much more expensive. According to USDA data, the cost of fruit has increased as high as 20%. Certain meat products have increased by 18%. And certain wheat products have increased by 16%.

For someone on a fixed income, these numbers are devastating. And for retirees who do still have mortgage payments, car loans, and other debt, fixed income and inflation can create the perfect storm.

What Is the Consumer Price Index?

The Consumer Price Index measures the prices of a diverse range of goods and services that are purchased by consumers. The CPI-W specifically addresses living costs for urban wage earners and clerical workers, which is around 28% of the population. The CPI-W is what the Bureau of Labor Statistics uses to determine changes to Social Security benefits. If you’re wondering what exactly goes into the CPI basket, it’s mostly housing (42%) followed by transportation costs (16%), food and beverage (15%), other goods and services (12%), recreation (6%), and medical care (9%).

What Is COLA?

COLA stands for cost of living adjustment. Prior to 1972, Social Security increases had to be specially approved by Congress. But with the creation of the COLA Provision in the 1972 Social Security Amendments, automated COLA began in 1975. If the CPI-W indicates no changes to the cost of living, COLA will not be applied to Social Security benefits. But as it turns out, there have been COLA adjustments most years. In the past, these adjustments have ranged from a low 1.3% to as high as 8%, with 2022 falling around 5.9%. Remember that these numbers are meant to help benefits keep up with the rising costs of goods and services. A big COLA announcement is in store for 2023. This is an especially substantial relief for seniors whose Social Security incomes just don’t have the buying power they used to.

How the SSA Calculates COLA

The Social Security Administration uses the Consumer Price Index (specifically the CPI-W for wage earners and clerical workers) to determine if COLA is applicable. Although this CPI is determined on a monthly basis, the COLA is determined annually—but only if there was an increase in the CPI-W between the third quarter of the current year and the third quarter of the previous year. As it turns out, this happens most years. These increases are rounded to the nearest tenth of one percent.

The purpose of these Cost of Living Adjustments is to make sure that Social Security benefits are adequate enough to keep up with the rising cost of goods and services, or inflation. It’s important to note that while inflation is far more nuanced than an actual number, the COLA is a federal adjustment. Groceries are indeed more expensive in New York than they are in Texas, and gas may be more expensive in Hawaii than in either of those states. This is why it’s important for people still in the workforce to have a retirement plan, because even COLA adjustments cannot account for everything. But for many Americans on Social Security, they will certainly account for a substantially positive change.

10 Types of Inflation

Why does inflation happen? There are actually 10 different types of inflation.

Creeping

When prices rise less than 3%, this is considered creeping inflation.

Walking (trotting)

As long as price increases stay in the single digits, they are considered walking or trotting.

Running (galloping)

Once price increases surge above 10%, inflation is said to be running or galloping.

Cost-push

Cost-push is both a cause of inflation and a type of inflation. Cost-push inflation occurs when the price of labor or raw materials rises, making it more expensive to produce goods and services. This in turn pushes the price higher for the consumer.

Demand-pull

When the demand for goods and services outruns the supply, the classic law of supply and demand means that prices are going up…which causes demand-pull inflation.

Deflation

Deflation is the opposite of inflation. It means the prices of goods and services are going down.

Disinflation

Disinflation refers specifically to the rate of change of inflation or deflation. Basically, it tracks how fast prices are inflating or deflating.

Reflation

Reflation is actually a policy enacted by the government and the Federal Reserve Bank to curb inflation by increasing government spending or the supply of money. They can also attempt to reflate the economy by lowering interest rates, which stimulates borrowing and spending.

Hyperinflation

Hyperinflation is something most people have never seen, but it does occur in some countries, sometimes. If inflation is spiraling beyond 1,000% per year, that’s hyperinflation.

Stagflation

Stagflation is the worst of both worlds: inflation and an economic downturn. Think of people not only having less purchasing power, but losing their jobs as well. According to many economic pundits, the U.S. is entering an era of stagflation.

What Is the Inflation Reduction Act?

The Inflation Reduction Act of 2022 (IRA) was passed by congress to curb inflation. The law promotes domestic clean energy production, lowers prescription drug prices, and reduces the deficit.

You don’t have to be living under a rock to know that inflation seems to be getting out of control. While we are not seeing the type of hyperinflation that has plagued countries like Venezuela and post-WWI Germany, we are seeing the cost of goods and services rise beyond what’s comfortable for most people—especially those living paycheck to paycheck. For people who are out of the workforce, in retirement, and living off a fixed income like Social Security, these changes can be disastrous.

Food items that were once affordable are now more expensive. Some shoppers may even have to take some items out of their cart. Prices at the pump have consumers shaking their heads. Couple this with the fact that American household debt already places a significant financial burden on many consumers, and the prospect of retirement does not seem appealing. Unfortunately, everyone has to retire at some point. And if they need to rely on Social Security payments to get by, they may be feeling the pinch.

This is where the Inflation Reduction Act comes into play. Among the many things it promises, the IRA will create more fair-paying clean energy jobs while incentivizing sustainability for businesses. It makes the tax code fairer by cracking down on tax dodgers and big corporations in order to raise revenue for much-needed programs like federal student aid. It will re-energize the manufacturing sector, especially in the green energy space. And it will lower healthcare costs, especially in the area of prescription drugs, which is good news for those beneficiaries paying Medicare Part B premiums.

But in addition to all these wonderful selling points, the Inflation Reduction Act will primarily curb the rampant inflation that is plaguing our country. The cost of goods and services must stabilize, so fixed incomes go further. Remember that COLA or cost of living adjustments are applied to Social Security benefits when the CPI indicates a price increase. Some estimates suggest that Social Security benefits have lost 40% of their purchasing power since 2000, which means COLA changes have failed to keep up with inflation. However, the 2023 Social Security increase is a historic boost that adjusts to the higher cost of living. Coupled with the long-term solution of the Inflation Reduction Act, things are looking better for those seniors collecting Social Security.

2023 Social Security Increase

Inflation has caused the 2023 Social Security increase to be the largest in 40 years. The increase in benefits is meant to offset the rising prices that make it cost more to live. If someone is collecting Social Security benefits, and these benefits provide the bulk of their income, there is a decent chance that they cannot just magically increase their cash flow. Using a credit card, even the best credit card with cash back, would put them into debt (and seniors tend to rank best in terms of average American debt by age). What they need is a change to the benefits they are getting, in order to keep up with inflation. For Social Security recipients, the % increase brings some much needed relief.

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