Many senior citizens in the United States are poised to receive what may be the largest increase of their lives.
The amount of the annual percentage increase in Social Security benefits that beneficiaries will receive will be disclosed by the U.S. government on Thursday. It will almost certainly be the biggest in forty years. All of this is a part of a yearly routine in which Washington modifies Social Security payouts to match inflation, or at least a specific measure of it.
The change, also referred to as a COLA or cost-of-living adjustment, is highly contentious. Critics claim that the statistics the government used to determine the rise does not accurately reflect what older Americans actually spend and, consequently, the inflation they experience. The benefit increase is also universal, meaning beneficiaries receive the same raise regardless of where they live or the size of their retirement savings.
Take a look at what’s going on:
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WHAT’S THE BIG DEAL?
The more than 65 million recipients of Social Security will soon receive a monthly payment boost from the U.S. government. Depending on your estimate, the boost might be as high as 9%.
WHAT DO BENEFICIARIES HAVE TO DO TO GET IT?
Nothing.
WILL THIS BE THE BIGGEST INCREASE EVER?
No, but it’s probably the biggest in 40 years—the length of time that the vast majority of Social Security recipients have received payments. The growth was 11.2% in 1981.
WHEN WILL THE BIGGER PAYMENTS BEGIN?
January. They compound and are also permanent. That indicates that the percentage rise for the following year, whatever it may be, will be in addition to the new, larger payment beneficiaries get as a result of this most recent raise.
HOW BIG WAS THIS PAST YEAR’S INCREASE?
5.9%, which was the highest level in almost 40 years.
WHAT’S THE TYPICAL INCREASE?
Since 2000, it has been 2.3% on average, showing remarkable stability across many economic ups and downs. The economy’s greater concern during some of those years’ most trying times was simply that inflation was running too low.
Because inflation was so low after the 2008 financial crisis, the U.S. government indicated three times that Social Security payouts would not increase.
SO THE INCREASE IS TO MAKE UP FOR INFLATION?
That is the goal. Each dollar doesn’t go as far at the grocery store anymore, as Americans have painfully learned over the past year.
HAS SOCIAL SECURITY ALWAYS GIVEN SUCH INCREASES?
No. Ida May Fuller of Ludlow, Vermont, the first American to receive a monthly retirement check from Social Security, received the same $22.54 payment for a period of ten years.
After a legislation mandating them was passed in 1972, Social Security’s automatic annual cost-of-living adjustments didn’t start until 1975.
HOW IS THE SIZE OF THE INCREASE SET?
It is linked to the CPI-W index, a measure of inflation that tracks the types of prices paid by urban wage earners and office workers.
More specifically, the rise is determined by the CPI-growth W’s rate from one summer to the next.
IS THAT THE INFLATION MEASURE EVERYONE FOLLOWS?
No. The CPI-U index, which accounts for all urban consumers and is a far more comprehensive indicator of inflation, is often given greater attention. In total, 93% of Americans are covered by this.
Meanwhile, just roughly 29% of Americans are included in the CPI-W. It has existed for a longer period of time than the CPI-U, which the government only started to compile following the passage of the law requiring the yearly increases in Social Security benefits to be related to inflation.
IS THAT WEIRD?
Yes, and some detractors have long advocated that Social Security should be replaced with a different metric, one that is more closely tied to the needs of elderly people in particular.
A different experimental measure known as CPI-E is meant to provide a more accurate representation of how Americans aged 62 and over spend their money. Compared to the CPI-U or CPI-W, it has historically shown elderly Americans to have greater inflation rates, but it has not gained traction. Neither have other statistics gathered by non-governmental organisations that aim to demonstrate how inflation directly impacts senior citizens in America.
In comparison to CPI-W or CPI-U, the CPI-E has recently displayed slightly less inflation.
WHY NOT USE ONE OF THOSE OTHER INDEXES?
The government uses the same survey data that it uses to determine the CPI-U in its entirety to calculate the CPI-E. However, there aren’t many senior households in that data set, so it could not be entirely accurate.
All indices just provide a rough estimate of what inflation actually is. However, the more serious issue may be that Social Security would have to pay out larger benefits if the government switched to a new index, one that indicated higher inflation for older Americans.
That would result in a quicker depletion of the Social Security trust fund, which, at the current rate, appears to run out in just over ten years.
HOW IS THE SIZE SET FOR SOCIAL SECURITY BENEFITS?
utilising a complex algorithm that accounts for a number of variables, including the amount an employee earned throughout their 35 highest-earning years. Up to a certain point, those who made more money and those who waited longer to begin receiving Social Security benefits typically received bigger payouts.
The maximum benefit that can be received this year for someone who retired at full retirement age is $3,345 per month.
WILL RICH PEOPLE GET THE SAME BOOST IN SOCIAL SECURITY?
Yes. Whether one is barely getting by or has millions of dollars saved for retirement, everyone receives the same percentage rise.
IF THE INCREASE IS BASED ON INFLATION IN URBAN AREAS, WILL PEOPLE IN RURAL AREAS GET THE SAME BOOST?
Yes.
According to William Arnone, president and chief executive officer of the National Academy of Social Insurance, “the COLA doesn’t consider where you live or your real spending patterns.” For some, the cost of living disparity between, instance, rural Midwestern towns and major cities like New York, Washington, D.C., or Chicago is exaggerated. Some will profit more” than others from the same-sized rise because many elderly individuals choose to live in suburban or rural locations.
DO BIGGER PAYOUTS NOW MEAN SMALLER PAYOUTS IN THE FUTURE?
Yes.
Every beneficiary of the anticipated rise will be happy, as will the nearby businesses that stand to gain from higher sales. However, it also means that Social Security will start disbursing benefits earlier, which might put extra pressure on the system’s trust fund.
The system won’t collapse after just one year of significant increases brought on by inflation, but it has been trending in that direction for a while. According to Social Security’s most recent annual trustees report, the trust funds used to distribute retirement, survivorship, and disability benefits will be able to do so until 2035. Following that, incoming tax revenue will be sufficient to cover 80% of the planned benefits.
Yes.
WILL THIS MAKE INFLATION WORSE?
More money will be placed in the hands of those who most desperately need it and are most likely to use it. More fuel will be provided to the economy as a result, which may maintain pressure on inflation to rise.
However, the increase in Social Security will have less of an effect on the economy than previous stimulus packages from Washington, delays in supply chains brought on by global firm closures, or other reasons that experts believe are to blame for the highest inflation in decades.
SO EVERYTHING’S GOING TERRIBLY?
While many analysts anticipate inflation to decline as interest rate hikes take effect and supply chains continue to advance, the likelihood of a recession seems to increase daily.
For instance, economists at Deutsche Bank predict that inflation will decline from 8.2% in August of last year to 7.2% in the final three months of this year. In the second half of 2023, they forecast a decrease to 3.9%.
For many Social Security recipients, this is crucial. If so, the COLA they receive in the following year will be greater than the inflation they are currently experiencing. That would assist in making up for the fact that this past year, real inflation far outpaced the cost-of-living boost they received in January 2022.
