Client Question: Social Security Inflation Adjustment

July 21, 2022

Inflation impacts all of us – especially those on a fixed income. A client recently asked me if social security benefits would see a meaningful increase in the near future. Great question!

Ever since 1975, social security benefits have been increase annually via Cost of Living Adjustments (or COLAs). Here is a chart of COLAs over time.

While the methodology and timing of COLAs has changed over the years, here is how it will work in 2022

*Inflation metric: Adjustments are calculated using a measure of inflation, namely the Consumer Price Index (CPI) for Urban Wage Earners and Clerical Workers, known as CPI-W. CPI measures the change in prices paid by consumers for goods and services. CPI-W picks up changes in prices for households that meet two requirements: (1) more than one half of the household’s income must come from clerical or wage occupations and (2) at least one of the household’s earners must have been employed for at least 37 weeks during the previous 12 months. The CPI-W population represents about 29 percent of the total U.S. population

*Calculation: The COLA for social security is the increase in the CPI-W from the third quarter of the prior year to the corresponding quarter of the current year. So for 2022, the adjustment will equal the percentage change in CPI-W from Q3 2021 to Q3 2022

*Timing: The increase will begin with benefits that Social Security beneficiaries receive in January 2023

*Estimated increase for 2023: Given the fact that the calculation relies of actual inflation data for a time period we haven’t reached yet (Q3 2022), the actual percentage is unknown. However, the most recent inflation data showed an increase in CPI-W of 9.8% year over year. Again, the actual COLA will depend on how inflation trends over the next few months

We will see what the COLA ends up being for this year but it is likely to give some assistance to social security recipients in the upcoming year!

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