Social Security’s COLA: What is the best way to calculate the increase?
Published: Aug. 31, 2023 at 12:45 p.m. ET
Social Security benefits are adjusted for inflation every year, but the index the program is tied to doesn’t always result in the largest possible increase for retirees.
Legislators have proposed switching that index from the CPI-W, which measures the spending of urban wage workers, to the CPI-E, which focuses more on the spending of older Americans. The CPI-E would typically yield a higher cost-of-living adjustment for benefits, said Mary Johnson, a Social Security and Medicare policy analyst at the Senior Citizens League.
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Social Security benefits are adjusted for inflation every year, but the index the program is tied to doesn’t always result in the largest possible increase for retirees.
Legislators have proposed switching that index from the CPI-W, which measures the spending of urban wage workers, to the CPI-E, which focuses more on the spending of older Americans. The CPI-E would typically yield a higher cost-of-living adjustment for benefits, said Mary Johnson, a Social Security and Medicare policy analyst at the Senior Citizens League.
The current estimate for next year’s Social Security COLA is 3%, compared with 4% if it followed the CPI-E, according to the Senior Citizens League.
However, that’s not always the case, Johnson noted. In 2022 and 2023, for example, the CPI-W outpaced the CPI-E, thanks in part to higher gas prices. The year in which a person retires could also have an effect on their benefits, Johnson said. The CPI-E weighs medical costs and housing needs more heavily than the CPI-W.
Rep. John Larson, a Democrat from Connecticut, this year reintroduced his proposed Social Security 2100 Act, which is aimed at fixing the program’s current insolvency issue and improving it for beneficiaries. Social Security’s two trust funds, which support the program’s retired and disabled beneficiaries, are expected to run out of money in the next 11 years, and if Congress does nothing, beneficiaries could see a 20% benefit cut.
Larson has been pushing for the passage of the Social Security 2100 Act for years. His latest proposal includes a provision that would tie the benefits to either the CPI-E or the CPI-W, whichever yields the higher COLA in a given year.
The percentages may seem minimal when comparing the CPI-W and CPI-E in some years, but they can have a huge impact on benefits. “Those small percentages can compound every time the benefit is adjusted,” Johnson said. “Those small differences over time can really add up in extra retirement income.”
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