Americans are still feeling the pressure of higher prices, but the current rampant inflation also means retirees may soon benefit from the highest Social Security increase in more than four decades.
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The average Social Security benefit is currently $1,656, and for many seniors, this monthly check is their only source of income. With budgets under pressure, older Americans eagerly await the announcement of the 2023 Cost of Living Adjustment (COLA).
More than half of all elderly households have no savings to fall back on, says Mary Johnson, a social security and health care policy analyst at advocacy group The Senior Citizens League.
“About 90% or more of their income comes from Social Security alone,” explains Johnson.
“So that particular type of retiree is very dependent on Social Security and they are very dependent on a COLA that keeps up with inflation enough.”
But while this will likely be the largest Social Security COLA most recipients have ever received, proponents say flaws in the system leave seniors behind.
2023 COLA could be the biggest since 1981
The Senior Citizens League predicts Social Security’s COLA could reach 8.7% next year — the highest increase since 1981. This would increase the average pension benefit for retirees by about $144.
The official COLA announcement is likely to come sometime around October 13, after September inflation data was released.
Still, Johnson and other proponents argue that the current formula for making sure Social Security keeps up with inflation is flawed.
The COLA is not based on the spending patterns of older and disabled adults who make up the majority of Social Security recipients, Johnson notes. Instead, it is based on the consumer price index for urban wage earners and white-collar workers (CPI-W).
She indicated in a press release on Wednesday that this calculation gives more weight to gasoline and transportation costs. While transportation is one of the fastest growing spending categories for seniors, other priorities are rising in price even faster.
“I would say, while this is currently a chronic problem every year, yes, there is evidence that the COLA will not reflect continued high inflation affecting retirees and disabled Social Security recipients, putting tens of millions of retirees at risk of falling behind. Johnson said in the briefing.
“The lifeboat is leaking and soaking up water, putting older Americans at risk of financial drowning.”
Johnson recommends examining the spending behavior of older and disabled adults to determine how to weight each category in the index more accurately.
Seniors, for example, tend to spend more time at home, which means they may face higher energy costs for heating and electricity.
The Bureau of Labor Statistics reported that electricity prices rose 15.8% in August from a year ago, the largest 12-month increase since the period ending August 1981.
Seniors also use “twice as much or more” in health care compared to younger people, Johnson says.
She proposes to further develop the Consumer Price Index for the Elderly (CPI-E) and use that measure to calculate the annual COLA instead.
This year’s COLA failed to keep up with inflation
Seniors received a COLA of 5.9% in January, but that was not enough to offset the skyrocketing inflation this year. In fact, Johnson calculates that the payment in the month of August lagged by 48%.
The fastest-growing spending categories for retirees this year are food, housing and transportation (in that order), she adds.
“Their biggest expense is in the supermarket. And that has been a big challenge for about one in two older households.”
And while inflation appears to be moderating, Johnson is warning it won’t fall significantly in the coming months.
Gas prices fell significantly towards the end of the summer, but she points out that households will spend more on heating oil in the coming colder months.
The next COLA must also factor in rising health care costs, which eat up more and more of recipients’ monthly checks.
The Kaiser Family Foundation reports that over the past two decades, Medicare Part B premiums alone have increased from 6% to 10% of the average Social Security benefit. If you also factor in the Part A and Part B deductibles for hospital and physician services, the total cost has increased from 15% of the average Social Security benefit in 2002 to 19% in 2022.
What can seniors do?
Johnson advises seniors with savings to speak to a financial advisor and set aside an additional 10% to deal with current inflationary pressures.
You can talk to someone at your financial institution, but many senior centers, libraries, or community colleges may also have financial presentations and workshops or advisors you can chat with.
Aside from your day-to-day needs, Johnson also recommends that you prioritize budgeting for your medical care, as the cost of medical services and premiums may continue to rise.
Look at your medical coverage and deductibles and determine exactly how much you need in worst-case savings.
Out-of-pocket spending on prescription drugs is a major concern for seniors, although President Joe Biden’s Inflation Reduction Act “will be a huge help,” Johnson says.
The law will limit insulin copays to $35 per month from 2023 for Medicare beneficiaries, punish drug companies for imposing drastic price increases, and cover vaccinations for Medicare and Medicaid participants.
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This article provides information only and should not be construed as advice. It comes without any kind of warranty.