How December’s CPI Numbers Relate to the 8.7% COLA

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For the first time in more than a year, the Social Security cost-of-living adjustment (COLA) should soon outpace the U.S. inflation rate. The question now is when Social Security recipients will finally catch up on inflation hits they took in previous years.

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Inflation as measured by the index used to calculate the COLA was 6.3% in December, according to the Senior Citizens League, a nonpartisan seniors advocacy group. It cited the Labor Department’s latest inflation report, which was released on Thursday. That’s well below the 8.7% COLA Social Security recipients will receive in 2023.

The 6.3% rate refers to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). That’s what the Social Security Administration uses to calculate its annual COLA, rather than the CPI for All Urban Consumers, which is what most economists use.

If CPI-W inflation remains at 6.3% or lower moving forward, it will mark the first time in at least a year that the COLA is higher than inflation. Last year’s COLA of 5.9% did little to help seniors battle a 2022 inflation rate that ranged between 6.5% and 9.1% — the highest in more than 40 years.

So, will 2023 be the year seniors finally catch up?

“Before anyone can answer that question, we first need to have a measure of just how far Social Security benefits fell short due to COLAs that didn’t match up to actual inflation,” Mary Johnson, Social Security and Medicare policy analyst for The Senior Citizens League, said in a Thursday statement shared with LoansSpecialOffer.

A new analysis by Johnson found that since the start of the COVID-19 pandemic in 2020, Social Security benefits fell short of annual COLAs by about $1,054 on average through 2022.

Catching up this year depends on how much further consumer prices come down. The inflation rate announced on Thursday would shrink the shortfall by about $38.70 for the month, before the deduction for Medicare Part B premiums, which is $164.90.

Other highlights of Johnson’s analysis include the following:

  • In 2020, the 1.6% COLA kept pace with inflation, but only after March, when the pandemic shut down the economy and deflation temporarily set in. Average Social Security benefits ended the year ahead by $53 a month prior to deductions for Medicare Part B premiums. However, the Medicare Part B premium rose 6.7% from the previous year to $144.60 a month, meaning that higher Medicare Part B premium costs ate up the COLA/inflation advantage.
  • In 2021, the 1.3% COLA left the average Social Security benefit behind by $612 for the year, or $51 per month. That was before the Medicare Part B premium of $148.50 per month.  
  • In 2022, the 5.9% COLA left the average Social Security benefit behind by $495 for the year or $41.25 per month. Again, this was before the deduction for Medicare Part B premiums of $170.10 per month – one of the biggest increases in Medicare history. 

When you run the math, the average COLA shortfall since the start of 2020 is $1,053.60. Based on that calculation, the average Social Security recipient will need to be ahead by about $88 a month to completely catch up.

Complicating matters this year is the fact that some Social Security beneficiaries might face higher taxes because the 2022 COLA pushed their combined income above $25,000 for single filers or $32,000 for couples.

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“A growing percentage of older taxpayers are hit with the tax on Social Security every year because the income thresholds subjecting benefits to taxation are fixed, unlike tax brackets which are adjusted for inflation,” the Senior Citizens League noted in a news release. “Had these income thresholds been adjusted since the tax on Social Security benefits became effective in 1984, the $25,000 level today would be about $73,040 and the $32,000 level would be $93,491.”

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