What is the purpose of COLA?
The purpose of the Cost of Living Adjustment (“COLA”) is to ensure that the purchasing power of SSD and SSI benefits are not eroded over time by inflation. COLAs are based on the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The Social Security Administration looks at the third quarter year over year difference. If there is a difference, there is an increase, if there is no increase in the CPI-W then SSA will not have a COLA.
Congress enacted the COLA in 1972, but they only began making year over year changes in 1975. Prior to 1975, increases were only made when Congress enacted special legislation.
Largest COLA in 40 years Due to Inflation
In 2022, a 5.9% COLA occurred. This was the largest COLA in nearly 40 years. 2022 has had some of the hottest inflation in 50 years, which leads many to believe that the COLA for 2023 will be even larger. The Consumer Price Index for Urban Wage Earners and Clerical Workers, has increased 8.9% over the last 12 months.
Because the adjustment is only made by looking at the 3rd quarter data, there are some that believe that inflation will cool somewhat. The Senior Citizens League estimates that the ultimate COLA for 2023, will be around 8.6%. This estimate is down somewhat from the estimate it made in March. That March estimate had the COLA at 8.9%.
COLA Predictions for 2023
It should be noted that the large adjustment is not guaranteed. If inflation subsides between now and the 3rd quarter, a lower adjustment, or even no increase will be made in 2023. Inflation is generally monitored by the Federal Reserve and the Federal Reserve has indicated that it plans on tamping down inflation by increasing interest rates.
Some experts predict that a recession is imminent while retail inventory is high. These experts predict that many retailers will be forced to drastically reduce prices to eliminate that excess inventory. If this scenario plays out, it will likely create a deflationary scenario for some products.
The Senior Citizens League has estimated that Social Security Benefits have lost 40% of their buying power since the year 2000. CPI-W is a subset of the CPI and is sometimes referred to as the “blue-collar measure.” Its market basket was made to reflect the expenditures of urban households that derive more than half their income from clerical and hourly wage jobs.
This measure covers merely 29% of the nation’s population. CPI-W gives more weight to everyday items such as food and transportation expenses, clothes, and other goods and services. Housing, medical care, and recreation are given less weight in the CPI-W.
The Future of the Social Security Trust Fund
The Social Security Trust fund is expected to be broke in 2034. Increased distribution due to inflation are only expected to speed up the insolvency issue. It will be interesting to see whether or not Congress takes measures to sure up the system.
Whether this will be accomplished by increasing funds going into the trust by increasing taxes or by slowing the rate at which funds exit the trust by reducing benefits is yet to be determined.