Social Security and Inflation
We have all been feeling the effects of inflation— and for most of us, those effects are less than ideal. We’re paying more at the grocery store, at the gas pump, and all of a sudden our paychecks get us less. But, there’s one group of Americans that have gotten some good(ish) news on inflation: Social Security beneficiaries.
The Social Security Administration does something for beneficiaries that is very helpful, and important. Annually, there’s an evaluation to determine whether macroeconomic factors— specifically, inflation— are affecting the cost of living. If that evaluation turns up evidence that inflation will affect Social Security beneficiaries, the Social Security Administration applies what they call a cost of living adjustment, or COLA. Through COLA, the Social Security Administration helps Social Security benefits keep up with inflation.
Interestingly (and don’t ask me why), the adjustment is determined based only on data from the third quarter of the fiscal year. So to determine the COLA number for 2023, the meter reading on inflation (so to speak), will happen between July and September of 2022. That means, the inflation we’re seeing right now as you’re reading this, is going to affect the COLA determination for next year.
Last year, COLA increased benefits by 5.9%— which was the biggest COLA increase in 40 years.
Early estimates project that next year, there will be an even higher increase. Some estimate that COLA will increase to 8%, while the nonpartisan organization the Committee for a Responsible Federal Budget says that number could be closer to 10.8%.
According to CBS News, the average monthly Social Security check in 2022 is about $1,658, which means a bump of 8% would boost the typical check to about $1,790, while a 10.8% COLA would boost the typical check to $1,837. It’s still early for projections, but most experts are predicting the COLA for 2023 to fall between that 8%-11% range.
We’ll know the 2023 COLA rate for sure by December at the latest, and updated benefits will begin getting paid out beginning in January 2023.
What About Minimum Wage?
Adjusting Social Security benefits for inflation is a positive thing for beneficiaries and, arguably, is what allows the Social Security Administration to stay relevant during difficult economic times and achieve their mission of providing financial support to retired Americans and people in need. But I can’t help but think of all of the federal programs that don’t keep track with inflation, like minimum wage.
The U.S. used to adjust the minimum wage to keep up with inflation and other cost of living metrics. And thank goodness for that, because in 1938, the minimum wage was $0.25. But here’s the thing: in 1968, the government stopped adjusting minimum wage for inflation. Now, the U.S. government does not have any legal requirement to periodically review minimum wage. There’s no Spring cleaning where Congress is like, “Hey, we’re in a global pandemic and a recession and completely reliant on essential workers, some of who are making minimum wage. Should we maybe pay them more?”
Nope, those conversations don’t happen… yet. But I can be hopeful. My home state of California, for example, has a provision in the law that allows for some wages to be raised in response to an increase in inflation over 7%. And that raise is going to go into effect. Governor Newsom announced that the minimum wage in California will go up from $15/hour to $15.50/hour starting in January 2023, but there are some California cities that have decided to raise wages even more, and those increases are taking place this month.
But back to our Social Security beneficiaries. A COLA hike is great news for the folks receiving Social Security benefits now, but potentially not such great news for the folks expecting to collect Social Security in a few decades. A larger COLA will cost the Social Security Administration tens of billions of dollars, and the Social Security Administration is already facing insolvency. It’s an issue we’ll see debated in Washington, so, stay tuned right here on The Money Minute.
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